Community Research and Development Information Service - CORDIS

The role of individual firms in inducing aggregate fluctuations

To date, there is little empirical evidence on the importance of large firms in generating aggregate fluctuations of output. An EU initiative worked to fill this gap.
The role of individual firms in inducing aggregate fluctuations
To advance empirical literature on this line of research, the EU-funded FIRMSFLUCTUATIONS (Firms, international trade, and aggregate fluctuations) project exploited data from French firms. It also emphasised the importance of international trade in measuring the role of large firms that cause aggregate fluctuations, thus providing a link between macroeconomics and international economics literature.

Project partners gained access to detailed French data during the period 1990-2007, and merged firm-level and export data. They identified firm-level idiosyncratic shocks by utilising the export orientation of firms. These idiosyncratic shocks contribute a significant amount to aggregate volatility of total sales and value added. By using sectoral input-output tables to measure firm-level interconnectedness, the FIRMSFLUCTUATIONS team showed that firms with greater such connections also have a higher correlation of idiosyncratic shocks.

Based on these research efforts, findings show that idiosyncratic shocks can explain up to 70 % of aggregate volatility, which stresses the importance of large firms. Furthermore, the importance of interconnectedness indicates the significance of linkages in transmitting shocks via input-output linkages.

FIRMSFLUCTUATIONS examined how firms’ import and export positions, together with their multinational status, impact how foreign shocks are transferred to firms through these linkages. It also considered what the microeconomic estimates signify about the overall transmission of shocks to the aggregate economy. Findings show that annual growth rates and value added for firms that have some form of international connection with another country are more linked with those countries’ annual gross domestic product growth compared to firms without such connections. On a macroeconomic level, the overall impact of microeconomic linkages implies that countries comove more if they share greater trade linkages.

Project work will help researchers to better understand the role of firms in generating macroeconomic volatility, as well as their importance in the transmission of shocks across countries.

Related information

Subjects

Life Sciences

Keywords

Firms, aggregate fluctuations, FIRMSFLUCTUATIONS, international trade, macroeconomics
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