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Firms, Destinations, and Aggregate Fluctuations

  • Julian di Giovanni

    (International Monetary Fund)

  • Andrei A. Levchenko

    (University of Michigan and NBER)

  • Isabelle Méjean

    (Ecole Polytechnique and CEPR)

This paper uses a database covering the universe of French firms for the period 1990-2007 to provide a forensic account of the role of individual firms in generating aggregate fluctuations. We set up a simple multi-sector model of heterogeneous firms selling to multiple markets to motivate a theoretically-founded set of estimating equations that decompose firms' annual sales growth rate into different components. We find that the firm-specific component contributes substantially to aggregate sales volatility, mattering about as much as the components capturing shocks that are common across firms within a sector or country. We then decompose the firm-specific component to provide evidence on two mechanisms that generate aggregate fluctuations from microeconomic shocks highlighted in the recent literature: (i) when the firm size distribution is fat-tailed, idiosyncratic shocks to large firms contribute to aggregate fluctuations (the "granularity" hypothesis of Gabaix, 2011), and (ii) sizable aggregate volatility can arise from idiosyncratic shocks due to input-output linkages across the economy (Acemoglu et al., 2012). We find that firm linkages are approximately twice as important as granularity in driving aggregate fluctuations.

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File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers626-650/r630.pdf
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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 630.

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Length: 47 pages
Date of creation: 30 Aug 2012
Date of revision:
Handle: RePEc:mie:wpaper:630
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