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FIRMS, DESTINATIONS, AND AGGREGATE FLUCTUATIONS
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FIRMS, DESTINATIONS, AND AGGREGATE FLUCTUATIONS
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Journal Article
FIRMS, DESTINATIONS, AND AGGREGATE FLUCTUATIONS
2014
Overview
This paper uses a data base 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 multisector 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.
