Large firm dynamics and the business cycle

Carvalho, Vasco M.; Grassi, Basile

Large firm dynamics and the business cycle

License

Citation

Carvalho, V, Grassi, B. Large firm dynamics and the business cycle. 2015. handle: http://hdl.handle.net/10230/23589

This citation was generated automatically.

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.