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Ownership networks and aggregate volatility

Listed author(s):
  • Lorenzo Burlon

    (Bank of Italy)

We study how aggregate volatility is influenced by the propagation of idiosyncratic shocks across firms through the network of ownership relations. To this purpose, we use detailed data on cross-holdings as well as relevant balance sheet information for almost the universe of Italian limited liability firms over the period 2005-2013. We first document that the ownership network matters for the correlation across firms' sales. Then, we construct a model where firms are linked through ownership relations and have limited access to credit markets. We characterize key features of the network structure that are relevant for the dynamics of the economy. A calibration to key features of the Italian economy shows that the model-implied volatility can account for a sizable percentage of actual GDP fluctuations. Moreover, we conduct a counterfactual exercise to isolate the role played by the network structure alone in the propagation of idiosyncratic shocks to the aggregate level.

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File URL: https://economicdynamics.org/meetpapers/2015/paper_1157.pdf
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Paper provided by Society for Economic Dynamics in its series 2015 Meeting Papers with number 1157.

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Date of creation: 2015
Handle: RePEc:red:sed015:1157
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Andrew T. Foerster & Pierre-Daniel G. Sarte & Mark W. Watson, 2011. "Sectoral versus Aggregate Shocks: A Structural Factor Analysis of Industrial Production," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 1-38.
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  8. Vasco M. Carvalho, 2014. "From Micro to Macro via Production Networks," Working Papers 793, Barcelona Graduate School of Economics.
  9. Riyanto, Yohanes E. & Toolsema, Linda A., 2008. "Tunneling and propping: A justification for pyramidal ownership," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2178-2187, October.
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  11. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
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  13. Renzo Orsi & Francesco Turino, 2014. "The last fifteen years of stagnation in Italy: a business cycle accounting perspective," Empirical Economics, Springer, vol. 47(2), pages 469-494, September.
  14. Gaiotti, Eugenio, 2013. "Credit availability and investment: Lessons from the “great recession”," European Economic Review, Elsevier, vol. 59(C), pages 212-227.
  15. Dupor, Bill, 1999. "Aggregation and irrelevance in multi-sector models," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 391-409, April.
  16. Dow, Sandra & McGuire, Jean, 2009. "Propping and tunneling: Empirical evidence from Japanese keiretsu," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1817-1828, October.
  17. Michael Horvath, 1998. "Cyclicality and Sectoral Linkages: Aggregate Fluctuations from Independent Sectoral Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 781-808, October.
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