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Foreign shocks as granular fluctuations

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Abstract

This paper uses a dataset covering the universe of French firm-level sales, imports, and exports over the period 1993-2007 and a quantitative multi-country model to study the international transmission of business cycle shocks at both the micro and the macro levels. The largest firms are both important enough to generate aggregate fluctuations (Gabaix, 2011), and most likely to be internationally connected. This implies that foreign shocks are transmitted to the domestic economy primarily through the largest firms. We first document a novel stylized fact: larger French firms are significantly more sensitive to foreign GDP growth. We then implement a quantitative framework calibrated to the full extent of observed heterogeneity in firm size, exporting, and importing. We simulate the propagation of foreign shocks to the French economy and report one micro and one macro finding. At the micro level heterogeneity across firms predominates: 40 to 85% of the impact of foreign fluctuations on French GDP is accounted for by the "foreign granular residual" - the term capturing the fact that larger firms are more affected by the foreign shocks. At the macro level, firm heterogeneity dampens the impact of foreign shocks, with the GDP responses 10 to 20% larger in a representative firm model compared to the baseline model.

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  • Julian di Giovanni & Andrei A. Levchenko & Isabelle Mejean, 2020. "Foreign shocks as granular fluctuations," Economics Working Papers 1751, Department of Economics and Business, Universitat Pompeu Fabra.
  • Handle: RePEc:upf:upfgen:1751
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    Cited by:

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    2. Ma, Bing & Zheng, Min, 2022. "Heterogeneous firm dynamics and price setting behavior," Finance Research Letters, Elsevier, vol. 46(PB).
    3. Chang, Jeffery (Jinfan) & Du, Huancheng & Lou, Dong & Polk, Christopher, 2022. "Ripples into waves: Trade networks, economic activity, and asset prices," Journal of Financial Economics, Elsevier, vol. 145(1), pages 217-238.
    4. Yusuf Emre Akgündüz & Salih Fendoğlu, 2022. "Export Prices, Imported Inputs, and Domestic Supply Networks," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(3), pages 383-419, September.
    5. Jean-Charles Bricongne & Juan Carluccio & Lionel Fontagné & Guillaume Gaulier & Sebastian Stumpner, 2022. "From Macro to Micro: Large Exporters Coping with Common Shocks," Working papers 881, Banque de France.
    6. Bas,Maria & Fernandes,Ana Margarida & Paunov,Caroline, 2022. "How Resilient Was Trade to COVID-19 ?," Policy Research Working Paper Series 9975, The World Bank.
    7. Karamysheva, Madina & Seregina, Ekaterina, 2022. "Prudential policies and systemic risk: The role of interconnections," Journal of International Money and Finance, Elsevier, vol. 127(C).
    8. Stefano Costa & Federico Sallusti & Claudio Vicarelli & Davide Zurlo, 2022. "From Micro to Macro: Micro-Foundations of the Italian Business Cycle Co-movements During the Crises," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 8(3), pages 499-522, November.

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    More about this item

    Keywords

    Granularity; shock transmission; aggregate fluctuations; input linkages; international trade;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F15 - International Economics - - Trade - - - Economic Integration
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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