Andrei Levchenko, Julian di Giovanni
After decades of globalisation, the structure of production is increasingly international, with supply chains crossing country borders. An important feature of this internationalisation of production is that the bulk of international trade linkages in a typical economy are held by only a few large firms (Freund and Pierola 2015). As a result, while only a minority of firms have direct trade linkages with foreign countries, those firms tend to account for a large share of aggregate economic activity (di Giovanni et al. 2017, 2018). How resilient is such an economy then to foreign business cycle shocks?
Our recent paper (di Giovanni et al. 2020) quantifies the consequences of a foreign shock to such an economy to study international shock transmission. Our point of departure is that even purely aggregate foreign shocks affect firms differentially depending on the extent and nature of their international linkages. In that sense, an aggregate shoc