International Trade and Aggregate Fluctuations in Granular Economies

Julian di Giovanni and Andrei Levchenko

No 585, Working Papers from Research Seminar in International Economics, University of Michigan

Abstract: This paper proposes a new channel through which international trade affects macroeconomic volatility. We study a multi-country model with heterogeneous firms that are subject to idiosyncratic firm-specific shocks. When the distribution of firm size follows a power law with exponent sufficiently close to -1, the idiosyncratic shocks to large Þrms have an impact on aggregate volatility. Opening to trade increases the importance of large Þrms to the economy, thus raising macroeconomic volatility. We next explore the quantitative properties of the model calibrated to data for the 50 largest economies in the world. Our simulation exercise shows that the contribution of trade to aggregate ßuctuations depends strongly on country size: in an economy such as the U.S., that accounts for one-third of world GDP, international trade increases volatility by about 3.5%. By contrast, trade increases aggregate volatility by some 30% in a small open economy, such as Belgium or Poland. The model performs well in matching the elasticity of macroeconomic volatility with respect to country size observed in cross-country data.

Keywords: Macroeconomic Volatility; Firm-SpeciÞc Idiosyncratic Shocks; Large Firms; International Trade (search for similar items in EconPapers)
JEL-codes: F12 F15 F41 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2009-02
New Economics Papers: this item is included in nep-int, nep-mac and nep-opm
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Citations: View citations in EconPapers (36)

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http://www.fordschool.umich.edu/rsie/workingpapers/Papers576-600/r585.pdf

Related works:
Working Paper: International Trade and Aggregate Fluctuations in Granular Economies (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:mie:wpaper:585

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