Research projects (co)funded by the Slovenian Research and Innovatian Agency.

Faculty of Economics

Member of University of Ljubljana

School of Economics and Business

Code

N5-0082

Project

Firm- level hubs and impact of granularity on the propagation of shocks and aggregate output fluctuations in a small open economy

Period

1.1.2018 - 31.12.2021

Range on year

1,10 FTE

Head

Jože Damijan

Research activity

Social sciences/Economics

Research Organisation

sicris.si

Abstract

Our research focuses on assessing the importance of firm-level idiosyncratic shocks on the aggregate output of the economy. This research program wants to provide a new and different approach to analyze macroeconomic fluctuations, by recognizing that heterogeneous behavior of the underlying microeconomic parts provide important new insights about the channels of macroeconomic fluctuations. These approaches are sometimes also referred to as the “granular origins” of aggregate fluctuations.

Researchers

sicris.si

The phases of the project and their realization

Our research focuses on assessing the importance of firm-level idiosyncratic shocks on the aggregate output of the economy. This research program wants to provide a new and different approach to analyze macroeconomic fluctuations, by recognizing that heterogeneous behavior of the underlying microeconomic parts provide important new insights about the channels of macroeconomic fluctuations. These approaches are sometimes also referred to as the “granular origins” of aggregate fluctuations.

Deliverables

Our primary focus on a firm-level analysis of two small open economies (Belgium and Slovenia), which is complemented by using input-output data at a very detailed industry level. The reason for this is twofold. Firstly, most recent theories stress the importance of firm-level shocks, making the use of firm-level data desirable. Secondly, as shown by di Giovanni and Levchenko (2012), small open economies are particularly exposed to aggregate volatility on account of micro-level shocks. The two broad work packages (WP) of our program will focus on:

WP1: Studying micro induced macro shocks using the Slovenian micro data

Deliverable D1.1: Effects of granularity on the propagation of demand shocks in a small open economy.

Expected: M30

Our research will base on a unique confidential dataset of all transactions between one of the largest manufacturing enterprises in Slovenia and the largest Slovenian exporter, based in electric appliances industry, and its complete supplier network. This will enable us to study first-order effects of actual shocks to demand of a large hub firm at the beginning of the economic downturn in early 2008. In the next step, we will match these transaction data of the selected hub firm with firm-level data for all Slovenian companies to study higher-order effects of the initial shock to the hub firm on economic activity across the economy. The analysis will showcase the importance of hub firms both as generators of aggregate growth in their immediate sphere of influence (first-order effects) as well as for possible higher-order effects on the rest of the regional and national economy. This will enable us to deliver policy suggestions by highlighting the potential of hub firms to generate strong positive or negative ripple effects across the economy.

WP2: Studying macro shocks induced by firm-level network effects using the Belgian detailed input-output tables and micro data

The work package will explore flows of intermediate and final products between companies and between highly disaggregated industries to determine the granularity of the production structure of the Belgian network economy. Research within this WP will be conducted at two levels – at sectoral level and at firm level. First study will focus on studying supplier linkages between detailed sub-industries, while the second study will analyze supplier linkages between firms.

Deliverable D2.1: Regional industrial hubs of economic activity and their impact on regional and aggregate output fluctuation in Belgium: Input-output analysis

Expected: M40

The first study will use very detailed 120-sector input-output tables of Belgian regions of Flanders, Wallonia and Brussels to tease out supplier linkages and to identify sub-industries serving as centers of regional economic activity with significant impact on aggregate output fluctuation through input-output linkages. By using the highly disaggregated input-output model, we will analyze the propagation of output and demand shocks of regional industrial hubs on regional and aggregate output fluctuations in Belgium. We will analyze the spreading of shocks to regional industrial hubs separately for the output and demand shocks as well as for the periods of economic downturns and economic recovery. This will enable us to understand how shocks to particular regional industrial hubs are propagated across the regional and aggregate economies and to draw implications for the potential needs of government interventions when particular regional hubs are hit by economic shocks.

Deliverable D2.2: Firm-level hubs of economic activity in Belgium and their impact on aggregate output and employment fluctuations: Network analysis

Expected: M42

The second study aims to use domestic inter-company transaction-level data to analyse supplier linkages between firms. To the best of our knowledge, this would constitute the first study to employ domestic inter-company transaction at this level of detail with the aim of establishing firms as hubs that have a particularly important effect on aggregate output fluctuation. In order to do this we will apply for using the VAT transactions data at the National Bank of Belgium (NBB). In addition, in both studies we also aim to study employment turnover in firms affected by shocks emanating from the hubs. This will enable us to study aggregate employment responses to micro shocks.As with the first work package, the ultimate aim will be to deliver policy suggestions while showcasing the potential of hub firms to generate strong positive or negativ

Describe the methodology of your research.

Be as detailed as necessary for a clear understanding of what you propose. Describe the different envisaged steps in your research, including intermediate goals. Indicate how you will handle unforeseen circumstances, intermediate results and risks. Show where the proposed methodology is according to the state of the art and where it is novel. Enclose risks that might endanger reaching project objectives and the contingency plans to be put in place should risk occur.

We plan on focusing on the impact of demand and supply shocks faced by “hub firms” as they reverberate through their supply and demand networks. Our modelling framework is based on supplier (Acemoglu et al. 2012) and credit network linkages (in the spirit of Altinoglu, 2015; Damijan, 2016) to show the aggregate effects of these shocks. More specifically, Acemoglu et al. 2012 provide a general mathematical framework for the analysis of the propagation of microeconomic shocks (reverberation) through the economy. This enables them to characterize the how the extent of propagations of idiosyncratic shocks and their role in aggregate fluctuations depend on the structure of interactions between different sectors.

Citations for bibliographic records

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