IDEAS home Printed from https://ideas.repec.org/p/upf/upfgen/1387.html
   My bibliography  Save this paper

Firms, destinations, and aggregate fluctuations

Author

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 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 decomposition of 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 directly contribute to aggregate fluctuations; and (ii) aggregate fluctuations can arise from idiosyncratic shocks due to input-output linkages across the economy. Firm linkages are approximately three times as important as the direct effect of firm shocks in driving aggregate fluctuations.

Suggested Citation

  • Julian di Giovanni & Andrei A. Levchenko & Isabelle Méjean, 2013. "Firms, destinations, and aggregate fluctuations," Economics Working Papers 1387, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2014.
    • Handle: RePEc:upf:upfgen:1387
    as

    Download full text from publisher

    File URL: https://econ-papers.upf.edu/papers/1387.pdf
    File Function: Whole Paper
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    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.
    2. Steven J. Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2007. "Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 107-180, National Bureau of Economic Research, Inc.
    3. David Thesmar & Mathias Thoenig, 2011. "Contrasting Trends in Firm Volatility," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 143-180, October.
    4. Diego A. Comin & Thomas Philippon, 2006. "The Rise in Firm-Level Volatility: Causes and Consequences," NBER Chapters, in: NBER Macroeconomics Annual 2005, Volume 20, pages 167-228, National Bureau of Economic Research, Inc.
    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, vol. 85(1), pages 42-52, September.
    6. Claudia Canals & Xavier Gabaix & Josep M. Vilarrubia & David Weinstein, 2007. "Trade patterns, trade balances and idiosyncratic shocks," Working Papers 0721, Banco de España.
    7. Toshihiko Mukoyama & Yoonsoo Lee, 2008. "Entry, Exit, and Plant-level Dynamics over the Business Cycle," 2008 Meeting Papers 454, Society for Economic Dynamics.
    8. Mark Gertler & Simon Gilchrist, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(2), pages 309-340.
    9. Miklós Koren & Silvana Tenreyro, 2007. "Volatility and Development," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(1), pages 243-287.
    10. Gourio, Francois & Kashyap, Anil K, 2007. "Investment spikes: New facts and a general equilibrium exploration," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 1-22, September.
    11. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
    12. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-177, March.
    13. Klette, Tor Jakob & Griliches, Zvi, 1996. "The Inconsistency of Common Scale Estimators When Output Prices Are Unobserved and Endogenous," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(4), pages 343-361, July-Aug..
    14. Rui Castro & Gian Luca Clementi & Yoonsoo Lee, 2008. "Cross-sectoral variation in firm-level idiosyncratic risk," Working Papers (Old Series) 0812, Federal Reserve Bank of Cleveland.
    15. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304-345.
    16. Vasco Carvalho & Xavier Gabaix, 2013. "The Great Diversification and Its Undoing," American Economic Review, American Economic Association, vol. 103(5), pages 1697-1727, August.
    17. Fortin, Nicole & Lemieux, Thomas & Firpo, Sergio, 2011. "Decomposition Methods in Economics," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 1, pages 1-102, Elsevier.
    18. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    19. Julian di Giovanni & Andrei A. Levchenko, 2010. "Putting the Parts Together: Trade, Vertical Linkages, and Business Cycle Comovement," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 95-124, April.
    20. Nicolas Berman & Philippe Martin & Thierry Mayer, 2012. "How do Different Exporters React to Exchange Rate Changes?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 437-492.
    21. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, May.
    22. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2011. "An Anatomy of International Trade: Evidence From French Firms," Econometrica, Econometric Society, vol. 79(5), pages 1453-1498, September.
    23. Anil K Kashyap & Owen A. Lamont & Jeremy C. Stein, 1994. "Credit Conditions and the Cyclical Behavior of Inventories," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 565-592.
    24. Russell W. Cooper & John C. Haltiwanger, 2006. "On the Nature of Capital Adjustment Costs," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(3), pages 611-633.
    25. Boyan Jovanovic, 1987. "Micro Shocks and Aggregate Risk," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 395-409.
    26. Jonathan Eaton & Samuel Kortum & Brent Neiman & John Romalis, 2016. "Trade and the Global Recession," American Economic Review, American Economic Association, vol. 106(11), pages 3401-3438, November.
    27. Lauren Cohen & Andrea Frazzini, 2008. "Economic Links and Predictable Returns," Journal of Finance, American Finance Association, vol. 63(4), pages 1977-2011, August.
    28. Teresa C Fort & John Haltiwanger & Ron S Jarmin & Javier Miranda, 2013. "How Firms Respond to Business Cycles: The Role of Firm Age and Firm Size," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(3), pages 520-559, August.
    29. Mark E. Doms & Timothy Dunne, 1998. "Capital Adjustment Patterns in Manufacturing Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 409-429, April.
    30. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    31. John Haltiwanger & Russell Cooper & Laura Power, 1999. "Machine Replacement and the Business Cycle: Lumps and Bumps," American Economic Review, American Economic Association, vol. 89(4), pages 921-946, September.
    32. Dupor, Bill, 1999. "Aggregation and irrelevance in multi-sector models," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 391-409, April.
    33. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2010. "Multiple-Product Firms and Product Switching," American Economic Review, American Economic Association, vol. 100(1), pages 70-97, March.
    34. repec:hal:spmain:info:hdl:2441/59cr4u3mmr9pobrceptvua5g8c is not listed on IDEAS
    35. Steven J. Davis & John Haltiwanger, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 819-863.
    36. Steven J. Davis & R. Jason Faberman & John Haltiwanger, 2006. "The Flow Approach to Labor Markets: New Data Sources and Micro-Macro Links," Journal of Economic Perspectives, American Economic Association, vol. 20(3), pages 3-26, Summer.
    37. Bernard Herskovic & Bryan Kelly & Hanno Lustig & Stijn Van Nieuwerburgh, 2020. "Firm Volatility in Granular Networks," Journal of Political Economy, University of Chicago Press, vol. 128(11), pages 4097-4162.
    38. Giuseppe Moscarini & Fabien Postel-Vinay, 2012. "The Contribution of Large and Small Employers to Job Creation in Times of High and Low Unemployment," American Economic Review, American Economic Association, vol. 102(6), pages 2509-2539, October.
    39. Daron Acemoglu & Vasco M. Carvalho & Asuman Ozdaglar & Alireza Tahbaz‐Salehi, 2012. "The Network Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 80(5), pages 1977-2016, September.
    40. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-858, May.
    41. Shea, John S, 2002. "Complementarities and Comovements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 412-433, May.
    42. Sophie Osotimehin, 2019. "Aggregate productivity and the allocation of resources over the business cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 180-205, April.
    43. John Haltiwanger, 1997. "Measuring and analyzing aggregate fluctuations: the importance of building from microeconomic evidence," Review, Federal Reserve Bank of St. Louis, issue May, pages 55-78.
    44. Stockman, Alan C., 1988. "Sectoral and national aggregate disturbances to industrial output in seven European countries," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 387-409.
    45. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    46. Sophie Osotimehin, 2019. "Aggregate productivity and the allocation of resources over the business cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 180-205, April.
    47. Caballero, Ricardo J & Engel, Eduardo M R A & Haltiwanger, John, 1997. "Aggregate Employment Dynamics: Building from Microeconomic Evidence," American Economic Review, American Economic Association, vol. 87(1), pages 115-137, March.
    48. Blum, Bernardo S. & Claro, Sebastian & Horstmann, Ignatius J., 2013. "Occasional and perennial exporters," Journal of International Economics, Elsevier, vol. 90(1), pages 65-74.
    49. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Glenn Magerman & Karolien De Bruyne & Emmanuel Dhyne & Jan Van Hove, 2016. "Heterogeneous firms and the micro origins of aggregate fluctuations," Working Paper Research 312, National Bank of Belgium.
    2. Chen Yeh, 2016. "Are firm-level idiosyncratic shocks important for U.S. aggregate volatility?," Working Papers 16-47, Center for Economic Studies, U.S. Census Bureau.
    3. Chen Yeh, 2017. "Are firm-level idiosyncratic shocks important for U.S. aggregate volatility?," Working Papers 17-23, Center for Economic Studies, U.S. Census Bureau.
    4. Vasco M. Carvalho & Basile Grassi, 2019. "Large Firm Dynamics and the Business Cycle," American Economic Review, American Economic Association, vol. 109(4), pages 1375-1425, April.
    5. Bernard Herskovic & Bryan Kelly & Hanno Lustig & Stijn Van Nieuwerburgh, 2020. "Firm Volatility in Granular Networks," Journal of Political Economy, University of Chicago Press, vol. 128(11), pages 4097-4162.
    6. Ignacio Rosal, 2018. "Power laws in EU country exports," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 45(2), pages 311-337, May.
    7. Can Tian, 2014. "Forecast Shocks in Production Networks," 2014 Meeting Papers 87, Society for Economic Dynamics.
    8. Paula Garda & Volker Ziemann, 2014. "Economic Policies and Microeconomic Stability: A Literature Review and Some Empirics," OECD Economics Department Working Papers 1115, OECD Publishing.
    9. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, May.
    10. Masashige Hamano & Francesco Zanetti, 2017. "Endogenous Turnover and Macroeconomic Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 263-279, October.
    11. Imbs, Jean & Pauwels, Laurent, 2019. "Fundamental Moments," CEPR Discussion Papers 13662, C.E.P.R. Discussion Papers.
    12. Stelios Giannoulakis & Plutarchos Sakellaris, 2023. "Financial crises, firm‐level shocks and large downturns: Evidence from Greece," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1549-1562, April.
    13. Norbert Czinkán, 2017. "The Role of Individual Firms in Aggregate Fluctuations: Evidence from Hungary," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 16(2), pages 40-63.
    14. Kramarz, Francis & Martin, Julien & Mejean, Isabelle, 2020. "Volatility in the small and in the large: The lack of diversification in international trade," Journal of International Economics, Elsevier, vol. 122(C).
    15. Basile Grassi & Vasco Carvalho, 2015. "Firm Dynamics and the Granular Hypothesis," 2015 Meeting Papers 617, Society for Economic Dynamics.
    16. Roberto Roson & Martina Sartori, 2016. "Input--output linkages and the propagation of domestic productivity shocks: assessing alternative theories with stochastic simulation," Economic Systems Research, Taylor & Francis Journals, vol. 28(1), pages 38-54, March.
    17. Dongyeol Lee, 2019. "Transmission of Domestic and External Shocks through Input-Output Network: Evidence from Korean Industries," IMF Working Papers 2019/117, International Monetary Fund.
    18. Barauskaite, Kristina & Nguyen, Anh D.M., 2021. "Global intersectoral production network and aggregate fluctuations," Economic Modelling, Elsevier, vol. 102(C).
    19. José Antonio Rodríguez-López, 2011. "Prices and Exchange Rates: A Theory of Disconnect," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(3), pages 1135-1177.
    20. Ernesto Pasten & Raphael S. Schoenle & Michael Weber & Michael Weber, 2017. "Price Rigidities and the Granular Origins of Aggregate Fluctuations," CESifo Working Paper Series 6619, CESifo.

    More about this item

    Keywords

    Aggregate Fluctuations; Firm-Level Shocks; Large Firms; Linkages.;
    All these keywords.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:upf:upfgen:1387. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: http://www.econ.upf.edu/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.