Abstract:

Wedevelop a Functional Augmented Vector Autoregression (FunVAR) model to explicitly in
corporate firm-level heterogeneity observed in more than one dimension and study its interaction
 with aggregate macroeconomic fluctuations. Our methodology employs dimensionality reduction
 techniques for tensor data objects to approximate the joint distribution of firm-level characteris
tics. More broadly, our framework can be used for assessing predictions from structural models
 that account for micro-level heterogeneity observed on multiple dimensions. Leveraging firm
level data from the Compustat database, we use the FunVAR model to analyze the propagation
 of total factor productivity (TFP) shocks and monetary policy shocks on the US macroeconomy,
 examining their impact on both macroeconomic aggregates and the cross-sectional distribution
 of capital and labor across firms. Then, we use the proposed framework to identify cross-sectional
 uncertainty shocks and evaluate their effects on aggregate macroeconomic fluctuations.