Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 438: Do we need firm data to understand macroeconomic dynamics?

Michele Lenza () and Ettore Savoia ()
Additional contact information
Michele Lenza: ECB
Ettore Savoia: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: We study the role of heterogeneity in the revenues of individual firms for euro area macroecconomic dynamics. To this end, we specify two models: a standard aggregate vector autoregressive model (VAR) and an “heterogeneous VAR” (HVAR). The VAR model includes only aggregate data, while the HVAR model also incorporates the feedback loop between firms’ revenue distribution and aggregate variables. Our results demonstrate that the behavior of firms’ revenue distribution plays a significant role in explaining the dynamics of key euro area macroeconomic variables.

Keywords: Firm-level revenues; Functional Vector Autoregressions; Heterogeneous Agent Models; Business Cycle fluctuations

JEL-codes: C11; C32; C52; C54; E22; E32

Language: English

25 pages, July 1, 2024

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