Product Dynamics and Aggregate Shocks: Evidence from Japanese Product and Firm Level Data

Abstract

We examine the effects of shocks to aggregate productivity, foreign output demand, government expenditures, and demand for foreign liquidity on dynamics of products and exports of heterogeneous firms. The framework is motivated by open economy general equilibrium models of Bilbie, Ghironi and Melitz (2012) and Dekle, Jeong and Kiyotaki (2014). We first construct unique firm level data on products and exports from the Japanese Manufacturing Census. The data are more disaggregated than comparable U.S. data and available at the annual frequency (while US product level data are only available at five year intervals), which makes our data more suitable for examining the interaction between business cycles and firm-product heterogeneity. Our empirical results show that the development of new products is stimulated by improvements in not only firm level productivity but also aggregate productivity. We also find that a rise in foreign demand and a shock to depreciate the home real exchange rate increase product dynamics and exports.

Keywords: Product Adding, Product Dropping, Aggregate and Idiosyncratic Productivity Shocks, Foreign Demand Shocks, Exports, Real Exchange Rates.