Working Paper: CEPR ID: DP14122
Authors: Richard Friberg; Mark Sanctuary
Abstract: This paper uses firm x national market export and import data for all Swedish private sector firms for 1997-2014 to examine the firm-level contribution of trade and foreign ownership to the correlation between Swedish value added growth and partner country GDP growth. Export and import links increase the firm-level correlation but net out for firms that both export to and import from the same market, evidence that this type of ``natural hedging'' can help reduce a firm's exposure to foreign economic shocks. We proceed to aggregate the firm-level results to the whole economy and find that severing firm-level ties with a foreign market is predicted to lower the correlation between Swedish value added growth and foreign GDP growth from 0.72 to 0.64 on average. Gabaix's ``granularity'' of trade is central to this result: if all firms are given equal weight overall correlations are essentially unaffected by severing firm level ties. While natural hedging is quantitatively important at the firm level, it has little effect on overall comovements.
Keywords: international trade; transmission of shocks; granular effects; firm heterogeneity; natural hedging
JEL Codes: F14; F23; F44; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| matched trade (C78) | reduced exposure to foreign shocks (F69) |
| matched trade (C78) | correlation of firm-level value-added growth with foreign GDP growth (F23) |
| severing matched trade ties (F10) | lowered correlation of Swedish value-added growth with foreign GDP growth (F69) |
| natural hedging (F31) | minimal impact on overall comovement (F69) |