Working Paper: CEPR ID: DP9168
Authors: Julian Di Giovanni; Andrei A. Levchenko; Isabelle Mejean
Abstract: This paper provides a forensic account of the role of individual firms in generating aggregate fluctuations using data covering the universe of French firms for the period 1990?2007. We derive a theoretically-founded set of estimating equations that decompose firms? annual sales growth rate into different components. 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: (i) when the firm size distribution is fat-tailed, idiosyncratic shocks to large firms contribute to aggregate fluctuations (Gabaix, 2011), and (ii) sizable aggregate volatility can arise from idiosyncratic shocks due to input-output linkages across the economy (Acemoglu et al., 2012). We find that firm linkages are approximately twice as important as granularity in driving aggregate fluctuations.
Keywords: aggregate volatility; firm-level shocks; large firms; linkages
JEL Codes: E32; F12; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm-specific shocks (L20) | aggregate fluctuations (E10) |
| idiosyncratic shocks to large firms (E32) | significant aggregate fluctuations (E30) |
| input-output linkages (D57) | amplify effects of individual firm shocks on aggregate volatility (E32) |
| firm-specific shocks (L20) | export sales volatility (F14) |
| firm-specific shocks (L20) | domestic sales volatility (F44) |