Good Policy or Good Firms? International Competition and Aggregate Growth in a Granular World

This paper theoretically and quantitatively evaluates the hypothesis that, due to the existence of large firms (granularity), idiosyncratic shocks to individual firms can lead to significant variation in the growth of countries. I embed granularity, through finiteness in the set of firms, in a general equilibrium environment featuring monopolistic competition, growth, and international trade. Firm productivities grow according to idiosyncratic productivity shocks, which obey a Gibrat's law proportional growth process, and are the only source of growth in the model. I derive an approximate analytic mapping for the standard deviation of GDP growth in this framework, which is non-zero due to granularity. This mapping depends on only a few key parameters, which I estimate for a wide-range of countries using firm-level micro data. My results indicate that idiosyncratic shocks to firms can play a significant role in generating both short-run macroeconomic fluctuations and variation in longer-run growth trends, particularly for countries that engage heavily in international trade. Empirically, I show that the model does well in matching relative differences in GDP volatility across OECD countries.