Do Granular Shocks Generate Sizeable Aggregate Volatility?
11 Pages Posted: 19 Jan 2024
Date Written: December 27, 2023
Over the last decade, numerous economists have argued that firm-level idiosyncratic productivity shocks can generate much of the observed aggregate volatility if the firms are placed on a production network. We test this hypothesis using granular data on buyer-seller relations between more than half a million firms in the US economy. We find that firm-level shocks within a network setting generate less than a tenth of the observed aggregate volatility. While the network mechanism is capable of amplifying firm-level shocks, the numerical values of the structural properties of the network that generate this amplification are such that the amplification proves to be far from sufficient.
Keywords: Production Network, Aggregate Volatility, Powerlaw
JEL Classification: E30, C67, D57
Suggested Citation: Suggested Citation