DP9168 Firms, Destinations, and Aggregate Fluctuations

Author(s):	Julian di Giovanni, Andrei A. Levchenko, Isabelle Mejean
Publication Date:	October 2012
Keyword(s):	Aggregate Volatility, Firm-Level Shocks, Large Firms, Linkages
JEL(s):	E32, F12, F41
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=9168

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.