The Size of Micro-originated Aggregate Fluctuations: An analysis of firm-level input-output linkages in Japan

Author Name ARATA Yoshiyuki (Fellow, RIETI) / MIYAKAWA Daisuke (Hitotsubashi University)
Creation Date/NO. August 2021 21-E-066
Research Project Study Group on Corporate Finance and Firm Dynamics
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First draft: August 2021
Revised: August 2022


Recent studies (e.g., Acemoglu et al. (2012)) argue that microeconomic shocks propagate through input-output linkages and result in aggregate fluctuations. This paper challenges this view by quantifying the size of the micro-originated aggregate fluctuations. Our analysis relies on firm-level input-output data for Japan and non-asymptotic probabilistic results, which characterize the variance, tail probability, and distribution shape of aggregate output induced by microeconomic shocks. We find that microeconomic shocks contribute substantially to the aggregate variance but almost nothing to the tail probability of aggregate output. Furthermore, the distribution of aggregate output induced by microeconomic shocks turns out to be very close to a Gaussian, even though the central limit theorem does not hold. Since the distribution of the empirical GDP growth rates has a heavier tail than a Gaussian, microeconomic shocks cannot explain the observed extremes of the GDP growth rates.