FIRMS, DESTINATIONS, AND AGGREGATE FLUCTUATIONS

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.