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 ...
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.
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