Firms, destinations, and aggregate fluctuations

This paper uses a database covering the universe of French firms for the period 1990-2007 to provide a forensic account of the role of individual firms in generating aggregatefluctuations. We set up a simple multi-sector model of heterogeneous firms selling tomultiple markets to motivate a theoretically-founded decomposition of firms' annualsales growth rate into different components. We find that the firm-specific componentcontributes substantially to aggregate sales volatility, mattering about as much as thecomponents capturing shocks that are common across firms within a sector or country.We then decompose the firm-specific component to provide evidence on two mechanismsthat generate aggregate fluctuations from microeconomic shocks highlighted in the recentliterature: (i) when the firm size distribution is fat-tailed, idiosyncratic shocks tolarge firms directly contribute to aggregate fluctuations; and (ii) aggregate fluctuationscan 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 firmshocks in driving aggregate fluctuations.