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Firms, Destinations, and Aggregate Fluctuations

Author

Listed:
  • Isabelle Mejean

    (Ecole Polytechnique)

  • Andrei Levchenko

    (University of Michigan)

  • Julian di Giovanni

    (International Monetary Fund)

Abstract

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 ifrms 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-specic 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 rm size distribution is fat-tailed, idiosyncratic shocks to large rms 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.

Suggested Citation

  • Isabelle Mejean & Andrei Levchenko & Julian di Giovanni, 2013. "Firms, Destinations, and Aggregate Fluctuations," 2013 Meeting Papers 352, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:352
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    References listed on IDEAS

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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