Firm Heterogeneity and Aggregate Fluctuations

Marco Errico, Simone Pesce and Luigi Pollio
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Marco Errico: IMF
Simone Pesce: Central Bank of Ireland
Luigi Pollio: UMBC

No 06/RT/26, Research Technical Papers from Central Bank of Ireland

Abstract: We study how firm heterogeneity shapes the transmission of aggregate shocks. The aggregate response of macroeconomic outcomes to any source of aggregate shocks depends on both the average response across firms and the covariance between firms’ response and their economic weight, which determines whether heterogeneity amplifies or dampens fluctuations. Using U.S. Compustat data from 1990 to 2019 and the Generalized Random Forest estimator, we estimate firm-level responses of sales, investment, and debt issuance to business cycle fluctuations. We uncover substantial heterogeneity driven primarily by non-financial characteristics— particularly industry scope and firm size. Aggregating these responses reveals that firm heterogeneity dampens aggregate fluctuations, especially for investment and debt issuance, as larger firms tend to be less cyclical than the average firm. Our results carry over to exogenously identified shocks and to financial outcomes.

Keywords: Firm Heterogeneity; Firm Sensitivity; Aggregate Fluctuations; Machine Learning. (search for similar items in EconPapers)
JEL-codes: C14 D22 E32 (search for similar items in EconPapers)
Date: 2026-04
New Economics Papers: this item is included in nep-bec and nep-fdg
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