Mr. Francesco Grigoli, Emiliano Luttini, and Mr. Damiano Sandri
, n w g m τ − 1 w f n τ − 1 C o v ( ε g n t , ε f n t ) ︷ σ L τ 2 ( 5 )
The term σ G τ 2 captures the contribution of firms’ idiosyncratic shocks to aggregate fluctuations, absent propagation mechanisms across firms. When firm sizes are drawn from a distribution with finite variance, this term rapidly goes to zero as the number of firms increases. This diversification argument underpins the traditional assumption that idiosyncratic shocks do not matter for aggregate fluctuations. However, Gabaix (2011) showed that if the firmsizedistribution is fat
The results are presented in panel (a) in Figure 6 , which shows the estimated coefficients on the interaction term between monetary policy shocks and the fraction of young firms (solid blue line) together with the coefficients on the interaction between monetary policy shocks and the share of small firms (dashed red line). Neither the magnitude nor the significance of baseline results are affected by conditioning on firm size. At the same time, the estimates show that the firmsizedistribution, as proxied by the share of small firms, has no significant
Ms. Era Dabla-Norris, Laura Jaramillo, Frederico Lima, and Alexandre Sollaci
We examine the effect of size-dependent policies in developing economies by focusing on a set of regulations that are applicable to firms with 20 or more formal employees in Peru. Firms can adjust to the regulations by (a) reducing their size, (b) shifting employment composition, or (c) splitting into subunits that fall below the regulatory threshold. We show that these actions are consistent with observed discontinuities in the distributions of firm size and employment composition. We extend the framework proposed by Garicano et al. (2016) to model and estimate the Peruvian economy and perform counterfactual exercises. Size-dependent regulations are costly for the economy, especially in the presence of labor market rigidities, and lead to lower aggregate wages, profits, and output. We also find that access to informal labor does not mitigate the economic impact of the size-dependent regulations, as the increase in informal employment is largely offset by a decline in formal employment.
This paper investigates the microeconomic origins of aggregate economic fluctuations in Europe. It examines the relevance of idiosyncratic shocks at the top 100 large firms (the granular shocks) in explaining aggregate macroeconomic fluctuations. The paper also assesses the strength of spillovers from large firms onto SMEs. Using firm-level data covering over 14 million firms and eight european countries (Austria, Belgium, Finland, France, Germany, Italy, Portugal and Spain), we find that: (i) 40 percent of the variance in GDP in the sample can be explained by idiosyncratic shocks at large firms; (ii) positive granular shocks at large firms spill over to domestic SMEs’ output, especially if SMEs’ balance sheets are healthy and if SMEs belong to the services and manufacturing sectors.