Granular Sources of the Italian Business Cycle

A recent strand of literature has investigated the granular sources of the business cycle, i.e. to what extent firm-level dynamics have an impact on aggregate fluctuations. From a conceptual point of view, in the presence of fat-tailed firm-size distributions, shocks to large firms may not average out and may then have a direct effect on aggregate fluctuations; in addition, firm-to-firm linkages can propagate shocks to individual firms, leading to movements at the aggregate level. Using Cerved and INPS data, we test the granular hypothesis on a large sample of Italian firms, covering the period 1999-2014. Idiosyncratic Total Factor Productivity (TFP) shocks are found to explain around 30 per cent of aggregate TFP volatility; furthermore, the contribution of these linkages to firm-specific aggregate volatility is more important than that of the direct effect, especially for the manufacturing sector.