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Shock Transmission in Granular Economies: Impact of Pass-Through Effects of Idiosyncratic Microshocks to the Aggregate
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Shock Transmission in Granular Economies: Impact of Pass-Through Effects of Idiosyncratic Microshocks to the Aggregate
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Journal Article
Shock Transmission in Granular Economies: Impact of Pass-Through Effects of Idiosyncratic Microshocks to the Aggregate
2025
Overview
This paper studies the importance of shocks to the largest firms on the aggregate output. Using firm-level data on eight European countries (2006-2019), we find that shocks to the largest firms explain an important part of aggregate fluctuations. Our paper brings several novelties. Firstly, in addition to the aggregate level, we extend the analysis of the transmission of firm-level shocks to study the shocks at the sectoral level. Secondly, we provide a novel measurement for demand-side shocks within granularity. We show that idiosyncratic shocks affecting the largest 20 firms can explain almost half of the output volatility, which is consistent with Gabaix (2011). Moreover, demand-side shocks contribute a greater share to this volatility compared to supply-side shocks. Finally, we show that the smaller the sample of the largest firms, the larger the propagation effect of the shocks to GDP. This suggests that a few large firms drive a large part of the aggregate volatility, while volatility of other larger firms balances out on average.
Publisher
University of Ljubljana, Faculty of Economics,University of Ljubljana
Subject
/ GDP
