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International Trade and Aggregate Fluctuations in Granular Economies

Author

Listed:
  • Andrei A. Levchenko

    (University of Michigan)

  • Julian di Giovanni

    (IMF)

Abstract

This paper proposes a new channel through which international trade affects macroeconomic volatility. We study a multi-country model with heterogeneous firms that are subject to idiosyncratic firm-specific shocks. When the distribution of firm sizes follows a power law with exponent sufficiently close to −1, the idiosyncratic shocks to large firms have an impact on aggregate volatility. Opening to trade increases the importance of large firms to the economy, thus raising macroeconomic volatility. We next explore the quantitative properties of the model calibrated to data for the 50 largest economies in the world. Our simulation exercise shows that the contribution of trade to aggregate fluctuations depends strongly on country size: in an economy such as the U.S., that accounts for one-third of world GDP, international trade increases volatility by about 3.5%. By contrast, trade increases aggregate volatility by some 30% in a small open economy, such as Belgium or Poland. The model performs well in matching the elasticity of macroeconomic volatility with respect to country size observed in cross-country data.

Suggested Citation

  • Andrei A. Levchenko & Julian di Giovanni, 2009. "International Trade and Aggregate Fluctuations in Granular Economies," 2009 Meeting Papers 491, Society for Economic Dynamics.
  • Handle: RePEc:red:sed009:491
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    File URL: https://economicdynamics.org/meetpapers/2009/paper_491.pdf
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    References listed on IDEAS

    as
    1. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-1721, September.
    2. Claudia Canals & Xavier Gabaix & Josep M. Vilarrubia & David Weinstein, 2007. "Trade patterns, trade balances and idiosyncratic shocks," Working Papers 0721, Banco de España;Working Papers Homepage.
    3. George Alessandria & Horag Choi, 2007. "Do Sunk Costs of Exporting Matter for Net Export Dynamics?," The Quarterly Journal of Economics, Oxford University Press, vol. 122(1), pages 289-336.
    4. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, May.
    5. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151-1199.
    6. Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 57.
    7. Gatti, Domenico Delli & Guilmi, Corrado Di & Gaffeo, Edoardo & Giulioni, Gianfranco & Gallegati, Mauro & Palestrini, Antonio, 2005. "A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 489-512, April.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Jörn Kleinert & Julien Martin & Farid Toubal, 2015. "The Few Leading the Many: Foreign Affiliates and Business Cycle Comovement," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(4), pages 134-159, October.
    2. Joseph W. Gruber & Filippo di Mauro & Bernd Schnatz & Nico Zorell, 2011. "Where are global and U.S. trade heading in the aftermath of the trade collapse: issues and alternative scenarios," International Finance Discussion Papers 1017, Board of Governors of the Federal Reserve System (U.S.).
    3. Didier, Tatiana & Schmukler, Sergio L., 2013. "The financing and growth of firms in China and India: Evidence from capital markets," Journal of International Money and Finance, Elsevier, vol. 39(C), pages 111-137.
    4. Franziska Bremus, 2011. "Financial Integration and Macroeconomic Stability: What Role for Large Banks?," Discussion Papers of DIW Berlin 1178, DIW Berlin, German Institute for Economic Research.
    5. di Giovanni, Julian & Levchenko, Andrei A. & Rancière, Romain, 2011. "Power laws in firm size and openness to trade: Measurement and implications," Journal of International Economics, Elsevier, pages 42-52.
    6. Sebnem Kalemli-Ozcan & Bent Sorensen & Vadym Volosovych, 2014. "Deep Financial Integration And Volatility," Journal of the European Economic Association, European Economic Association, vol. 12(6), pages 1558-1585, December.
    7. Vannoorenberghe, G., 2012. "Firm-level volatility and exports," Journal of International Economics, Elsevier, vol. 86(1), pages 57-67.
    8. Neary, J Peter, 2009. "Two and a Half Theories of Trade," CEPR Discussion Papers 7600, C.E.P.R. Discussion Papers.
    9. Vasco Carvalho & Xavier Gabaix, 2013. "The Great Diversification and Its Undoing," American Economic Review, American Economic Association, pages 1697-1727.
    10. Melitz, Marc J. & Redding, Stephen J., 2014. "Heterogeneous Firms and Trade," Handbook of International Economics, Elsevier.
    11. Gary Gereffi & Xubei Luo, 2015. "Risks and Opportunities of Participation in Global Value Chains," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(4), pages 51-63, June.
    12. Buch, Claudia M. & Neugebauer, Katja, 2011. "Bank-specific shocks and the real economy," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2179-2187, August.
    13. Kazuo Nishimura & Alain Venditti & Makoto Yano, 2014. "Destabilization effect of international trade in a perfect foresight dynamic general equilibrium model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 357-392.
    14. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, May.
    15. di Giovanni, Julian & Levchenko, Andrei A., 2013. "Firm entry, trade, and welfare in Zipf's world," Journal of International Economics, Elsevier, pages 283-296.
    16. Jonathan Eaton & Samuel S. Kortum & Sebastian Sotelo, 2012. "International Trade: Linking Micro and Macro," NBER Working Papers 17864, National Bureau of Economic Research, Inc.
    17. Bremus, Franziska M., 2015. "Cross-border banking, bank market structures and market power: Theory and cross-country evidence," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 242-259.
    18. repec:hal:journl:dumas-00807765 is not listed on IDEAS

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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