“Foreign Shocks as Granular Fluctuations” by Dr. Julian di Giovanni
Julian di Giovanni
Universitat Pompeu Fabra (UPF)
This paper uses a dataset covering the universe of French firm-level sales, imports, and exports over the period 1993-2007, and a quantitative multi-country model to study the international transmission of business cycle shocks at both the micro and the macro levels. The largest firms are both important enough to generate aggregate fluctuations (Gabaix, 2011), and most likely to be internationally connected. This implies that the largest firms are the key channel through which foreign shocks are transmitted to France. Our quantitative framework captures firm-level heterogeneity in both export and intermediate goods import markets. We first use the model to derive a theoretically-founded estimation equation relating a firm's sales growth to its exposure to foreign shocks via its intermediate input linkages. Using the model-implied estimating equation, we establish that firms that import intermediate inputs react significantly more to foreign shocks. Second, we calibrate the model to the observed firm- and country-level trade data, and perform counterfactual exercises intended to capture the response of individual French firms and macro aggregates to foreign shocks. The counterfactuals reveal the quantitative importance of “granular” firms in transmitting the foreign shocks to the French economy, due to the combination of their import and export linkages with foreign countries and their large size relative to the overall French economy.