Large Firm Dynamics and the Business Cycle
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Publication Date
2019-04Journal Title
American Economic Review
ISSN
0002-8282
Publisher
American Economic Association
Volume
109
Issue
4
Pages
1375-1425
Type
Article
This Version
AM
Metadata
Show full item recordCitation
Pereira Marques de Carvalho, V., & Grassi, B. (2019). Large Firm Dynamics and the Business Cycle. American Economic Review, 109 (4), 1375-1425. https://doi.org/10.1257/aer.20151317
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.
Sponsorship
ERC, Keynes Fund
Funder references
European Research Council (337054)
Leverhulme Trust (PLP-2016-209)
Economic and Social Research Council (ES/R009295/1)
Identifiers
External DOI: https://doi.org/10.1257/aer.20151317
This record's URL: https://www.repository.cam.ac.uk/handle/1810/287755
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