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Plant-Plant Covariance and Aggregate Volatility - Jesse Tweedle

Date & Time:
March 4, 2015 | 3:00 pm - 4:00 pm
Jesse Tweedle

Aggregate macroeconomic volatility is the weighted sum of micro-level variances and covariances of micro-level.  Micro covariances account for the majority of aggregate volatility. Theoretical research suggests input-output linkages are the main determinants of these covariances, but little empirical evidence exists due to lack of input-output measures at the firm or plant level. I use the Canadian Annual Survey of Manufactures, a long manufacturing panel with detailed plant-level information on commodity inputs and outputs to create plant-plant variation in input-output linkages. I find that even after accounting for sector-province-level shocks, two plants that share inputs are significantly more correlated (both economically and significantly).  Increasing the common input share across all plant pairs by 1\% increases aggregate volatility by 0.0031, or a 4.5\% increase over the aggregate standard deviation of 0.068.

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