All Shook Up: International Trade and Firm-level Volatility

Despite the large theoretical literature on the macroeconomic dynamics arising from international trade, there is little theoretical research that rationalizes the relationship between a firm's trading patterns and its volatility. Our paper attempts to fill this gap by exploring the relationship between firms' exporting and importing status and firm-level volatility in a dynamic, stochastic, general equilibrium model. We augment the framework with heterogeneous firms and endogenous exporting from Ghironi and Melitz (2005) to allow for international input sourcing. In this framework, we examine the firm-level volatility generated by the model for a cross-section of firm types, which are defined to reflect the rich heterogeneity in firms' international activities. In line with recent empirical evidence on the link between a firm's trade status and its volatility, the model predictions are: (1) Exporters display lower volatility than non-exporters, whereas importers display higher volatility that non-importers. (2) Firms that trade for longer durations display lower volatility than firms switching in and out of international trade. (3) Firms that export to uncorrelated foreign markets are less volatile, whereas firms importing from uncorrelated foreign suppliers are more volatile.