Scandinavian Working Papers in Economics

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

No 465: The Role of Firm Heterogeneity for the Transmission of Aggregate Shocks

Michele Lenza, Giuseppe Pagano Giorgianni, Lorenza Rossi () and Ettore Savoia
Additional contact information
Michele Lenza: European Central Bank
Giuseppe Pagano Giorgianni: Sapienza University of Rome
Lorenza Rossi: Lancaster University
Ettore Savoia: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: We study whether firm-level heterogeneity helps explain U.S. macroeconomic fluctuations in response to aggregate shocks. Using quarterly Compustat and CRSP data from 1986 to 2025, we construct two revenue-based statistics inspired by the Melitz (2003) model: the average firm and the marginal near-default firm. These statistics summarize key features of the firm distribution. We augment a Bayesian VAR with these measures and compare its performance to a standard aggregate VAR and to a functional VAR that incorporates the full cross-sectional distribution of firm revenues. We find that firm-level heterogeneity contains information not captured by aggregate variables. Including the two statistics allows the VAR to closely replicate the impulse responses obtained using the functional VAR and improves out-of-sample forecast accuracy. These findings are robust to a replication using UK data.

Keywords: Firm heterogeneity; Entry and exit; Business cycles; Bayesian VAR; Functional VAR; Selection and default; Sufficient statistics; Aggregate shocks.

JEL-codes: C32; D22; E32; E37; G33

Language: English

47 pages, April 1, 2026

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