The authors examine, empirically and theoretically, the source and effects of fluctuations in the dispersion of producer-level sales and production over the business cycle. On the theoretical side, the authors study the effect of exogenous first- and second-moment shocks to producer-level productivity in a two-country DSGE model with heterogeneous producers and an endogenous dynamic export participation decision. First-moment shocks cause endogenous fluctuations in producer-level dispersion by reallocating production internationally, while second-moment shocks lead to increases in trade relative to GDP in recessions. Empirically, using detailed product-level data in the motor vehicle industry and industry-level data of U.S. manufacturers, the authors find evidence that international reallocation is indeed important for understanding cross-industry variation in cyclical patterns of measured dispersion.
Microeconomic Uncertainty, International Trade, and Aggregate Fluctuations
WP 14-30 - The extent and direction of causation between micro volatility and business cycles are debated.