Microeconomic uncertainty, international trade, and aggregate fluctuations

Alessandria, George; Choi, Horag; Kaboski, Joseph P.; Midrigan, Virgiliu

Working Paper

Microeconomic uncertainty, international trade, and aggregate fluctuations

Abstract: The extent and direction of causation between micro volatility and business cycles are debated. We 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, we study the expect 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, we find evidence that international reallocation is indeed important for understanding cross-industry variation in cyclical patterns of measured dispersion.

Keywords: Sunk cost; Establishment heterogeneity; Exporting; Uncertainty; ;

JEL Classification: E31; F12;