Large Firm Dynamics and the Business Cycle

Vasco Carvalho and Basile Grassi

American Economic Review, 2019, vol. 109, issue 4, 1375-1425

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.

JEL-codes: D21 D22 D24 E32 L11 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/aer.20151317
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Citations: View citations in EconPapers (60)

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Related works:
Working Paper: Large Firm Dynamics and the Business Cycle (2016)
Working Paper: Large Firm Dynamics and the Business Cycle (2015)
Working Paper: Large Firm Dynamics and the Business Cycle (2015)
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