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Large Firm Dynamics and the Business Cycle

Accepted version
Peer-reviewed

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Type

Article

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Authors

Pereira Marques de Carvalho, VM 
Grassi, Basile 

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 an analytical characterization of the law of motion of the aggregate state in this class of models – the firm size distribution – and show that 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.

Description

Keywords

38 Economics, 3802 Econometrics, 8 Decent Work and Economic Growth

Journal Title

American Economic Review

Conference Name

Journal ISSN

0002-8282
1944-7981

Volume Title

109

Publisher

American Economic Association
Sponsorship
European Research Council (337054)
Leverhulme Trust (PLP-2016-209)
Economic and Social Research Council (ES/R009295/1)
ERC, Keynes Fund