Working Paper: CEPR ID: DP10587
Authors: Vasco M. Carvalho; Basile Grassi
Abstract: Do large firm dynamics drive the business cycle? We answer this question by developing a quantitative theory of aggregate fluctuations caused by firm-level disturbances alone. We show that a standard heterogeneous firm dynamics setup already contains in it a theory of the business cycle, without appealing to aggregate shocks. We offer a complete analytical characterization of the law of motion of the aggregate state in this class of models ? the firm size distribution ? and show that the resulting closed form solutions for aggregate output and productivity dynamics display: (i) persistence, (ii) volatility and (iii) time-varying second moments. We explore the key role of moments of the firm size distribution ? and, in particular, the role of large firm dynamics ? in shaping aggregate fluctuations, theoretically, quantitatively and in the data.
Keywords: aggregate fluctuations; firm size distribution; large firm dynamics; random growth
JEL Codes: E32; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| large firm dynamics (L25) | aggregate fluctuations (E10) |
| firm-level shocks (D22) | aggregate outcomes (E10) |
| fluctuations in the upper tail of the firm size distribution (D39) | movements in aggregate measures (E10) |
| firm size distribution (L25) | aggregate output (E10) |
| firm size distribution (L25) | productivity (O49) |