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Large Firm Dynamics and the Business Cycle

Vasco Carvalho () and Basile Grassi ()

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

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.

Keywords: Large Firm Dynamics; Firm Size Distribution; Random Growth; Aggregate Fluctuations (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
Date: 2016-04-30
Note: vmpmdc2
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http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1556.pdf

Related works:
Journal Article: Large Firm Dynamics and the Business Cycle (2019) Downloads
Working Paper: Large Firm Dynamics and the Business Cycle (2015) Downloads
Working Paper: Large Firm Dynamics and the Business Cycle (2015) Downloads
Working Paper: Large firm dynamics and the business cycle (2015) Downloads
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