Working Paper: NBER ID: w20061
Authors: Julian Di Giovanni; Andrei A. Levchenko; Isabelle Mejean
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-specific shocks; input-output linkages; multisector model
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 sales volatility (C43) |
| firm-specific shocks (L20) | aggregate sales volatility (via linkages effect) (E10) |
| firm-to-firm interactions (L14) | aggregate sales volatility (C43) |
| firm-specific shocks in concentrated industries (L19) | aggregate sales volatility (C43) |
| firm-specific component (G32) | volatility of exports (F10) |