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

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

Recent studies (e.g., Acemoglu et al (2012)) argue that microeconomic shocks to firms propagate on input-output linkages and result in aggregate fluctuations. However, little is known about the size of micro-originated aggregate fluctuations given the empirical firm-level input-output linkages. This paper analyzes the size of micro-originated aggregate fluctuations by combining probabilistic methods and the analysis of firm-level input-output linkages in Japan. We find that due to the heterogeneity of the input-output network, microeconomic shocks account for about 30% of observed aggregate variance, consistent with the granular hypothesis. However, we find that microeconomic shocks contribute almost nothing to the tail probability of aggregate output. This is because even when the CLT does not hold, the microeconomic shocks cancel each other out "to some extent", and the resultant distribution of aggregate output is close to a Gaussian. Therefore, given the empirical input-output network in Japan, our results show that microeconomic shocks turn out to cause aggregate fluctuations of a limited size.