Paper #1387

Title:

Firms, destinations, and aggregate fluctuations

Authors:

Julian di Giovanni, Andrei A. Levchenko and Isabelle Méjean

Date:

October 2013 (Revised: April 2014)

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.

Keywords:

Aggregate Fluctuations, Firm-Level Shocks, Large Firms, Linkages.

JEL codes:

E32, F12, F41

Area of Research:

Macroeconomics and International Economics

Published in:

Econometrica, 82:4 , 1303-1340, July 2014

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