Matched trade at the firm level and the micro origins of international business-cycle comovement

Abstract

This article uses firm × national market export and import data for all Swedish private sector firms for 1997–2014 to examine the firm-level contribution of trade and foreign ownership to the correlation between Swedish value added growth and partner country gross domestic product (GDP) growth. Export and import links increase the firm-level correlation but net out for firms that both export to and import from the same market, evidence that this type of ‘natural hedging’ can help reduce a firm's exposure to foreign economic shocks. We proceed to aggregate the firm-level results to the whole economy and find that severing firm-level ties with a foreign market is predicted to lower the correlation between Swedish value added growth and foreign GDP growth from 0.72 to 0.64 on average. Gabaix's ‘granularity’ of trade is central to this result: if all firms are given equal weight overall correlations are essentially unaffected by severing firm level ties. Natural hedging is quantitatively important at the firm level and also plays a role in limiting overall comovements.