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The Micro Origins of Macro

Paper Session

Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM

Pennsylvania Convention Center, 107-B
Hosted By: American Economic Association
  • Chair: Jennifer La'O, Columbia University

Price Rigidities and the Granular Origins of Aggregate Fluctuations

Ernesto Pasten
Central Bank of Chile
Raphael Schoenle
Brandeis University
Michael Weber
University of Chicago


We study the aggregate implications of sectoral shocks in a multi-sector New-Keynesian model with intermediate inputs featuring sectoral heterogeneity in price stickiness, sector size, and input-output linkages. Heterogeneity in price stickiness by itself can generate aggregate fluctuations from idiosyncratic shocks but it also distorts the ``granular'' effect of large sectors on aggregate volatility as well as the ``network'' effect of central sectors in the production network. This distortion affects both the magnitude of GDP volatility due to sectoral shocks and the identity of sectors driving aggregate fluctuations. Price rigidity can even distort the sign of fluctuations. Importantly, sector sales are no longer a sufficient statistic for a sector's contribution to aggregate volatility, as in Hulten (1978). We calibrate a 348-sector version of the model to the BEA input-output tables and BLS micro pricing data and find: (i) sectoral heterogeneity of price rigidity alone generates sizable GDP volatility from sectoral shocks; (ii) sectoral heterogeneity of price rigidity amplifies both the ``granular'' and the ``network'' effects; and (iii) sectoral heterogeneity of price rigidity alters the identity and relative contributions of the most important sectors for aggregate fluctuations. Price rigidity generates ``frictional'' origins of aggregate fluctuations conceptually different from the granular and network effects.

The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem

David Baqaee
London School of Economics
Emmanuel Farhi
Harvard University


We provide a nonlinear characterization of the macroeconomic impact of microeconomic TFP shocks in terms of reduced-form non-parametric elasticities for efficient economies. We also provide the mapping from structural parameters to these reduced-form elasticities, under general equilibrium. In this sense, the paper extends the foundational theorem of Hulten (1978) beyond first-order terms to capture nonlinearities. Key features ignored by first-order approximations that play a crucial role are: structural elasticities of substitution, network linkages, structural returns to scale, and the degree to which factors can be reallocated. Higher-order terms are large and economically interesting: they magnify negative shocks and attenuate positive shocks, resulting in an output distribution that is asymmetric (negative skewness), fat-tailed (excess kurtosis), and has a lower mean. They explain how small microeconomic shocks to critical sectors can have a large macroeconomic impact. To give a sense of magnitudes: in our benchmark calibration, output losses due to business cycle fluctuations are 0.6% of GDP, an order of magnitude larger than the cost of business cycles calculated by Lucas (1987), and are entirely due to a reduction in the mean of GDP because of nonlinearities in production; and accounting for second order terms increases the estimated impact of the price shock to the critical sector of oil in the 1970s from 0.7% to 2.4% of world GDP.

Granular Comparative Advantage

Cecila Gaubert
University of California-Berkeley
Oleg Itskhoki
Princeton University


Firms play a pivotal role in international trade, shaping the comparative advantage of countries. We propose a ‘granular’ multi-sector model of trade, which combines fundamental comparative advantage across sectors with granular comparative advantage due to outstanding productivity of individual firms. We develop a SMM-based estimation procedure, which takes full account of the general equilibrium of the model, and jointly estimate the fundamental and the granular forces using French micro-level data with information on firm domestic and export sales across manufacturing industries. The estimated granular model captures the salient features of micro-level heterogeneity across firms and industries, without relying on variation in model parameters across sectors. The estimated model implies that thirty percent of trade flows is explained by granular forces, and that sectors with the highest export shares are more likely to be of granular origin than sectors with average export shares. Extending the model to allow for firm-level productivity dynamics explains the majority of the change in the country’s comparative advantage over time. We further show that empirically measurable proxies of granularity have a substantial predictive ability for trade flows in the estimated model, even after controlling for fundamental comparative advantage of the sectors. Lastly, we show that the welfare gains from liberalizing a sector are shaped by the extent to which this sector is granular.

Large Firm Dynamics and the Business Cycle

Basile Grassi
Bocconi University
Vasco Carvalho
University of Cambridge


Do large firm dynamics drive the business cycle? We answer this question by developing
a quantitative theory of aggregate fluctuations caused by firm-level disturbances alone.
We show that a standard heterogeneous firm dynamics setup already contains in it a
theory of the business cycle, without appealing to aggregate shocks. We offer a complete
analytical characterization of the law of motion of the aggregate state in this class of
models – the firm size distribution – and show that the resulting closed form solutions for
aggregate output and productivity dynamics display: (i) persistence, (ii) volatility and
(iii) time-varying second moments. We explore the key role of moments of the firm size
distribution – and, in particular, the role of large firm dynamics – in shaping aggregate
fluctuations, theoretically, quantitatively and in the data.
Saki Bigio
University of California-Los Angeles
Ezra Oberfield
Princeton University
Lorenzo Caliendo
Yale University
Aureo de Paula
University College London
JEL Classifications
  • E0 - General
  • F4 - Macroeconomic Aspects of International Trade and Finance