Foreign Shocks as Granular Fluctuations

This paper uses a dataset covering the universe of French firm-level value-added, imports, and exports and a quantitative multicountry heterogeneous firm model to study the propagation of foreign shocks to the domestic economy. Foreign shocks are transmitted primarily through large firms as they are the most likely to trade internationally. At the micro level, the majority of the GDP impact of foreign shocks is accounted for by the “foreign granular residual,” a statistic capturing larger firms’ greater responsiveness to foreign shocks. At the macro level, firm heterogeneity attenuates the GDP impact of foreign shocks relative to a homogeneous firm counterfactual.