Large Firm Dynamics and the Business Cycle

Vasco Carvalho and Basile Grassi

No 10587, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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)
JEL-codes: E32 L11 (search for similar items in EconPapers)
Date: 2015-05
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
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Citations: View citations in EconPapers (61)

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Related works:
Journal Article: Large Firm Dynamics and the Business Cycle (2019)
Working Paper: Large Firm Dynamics and the Business Cycle (2016)
Working Paper: Large Firm Dynamics and the Business Cycle (2015)
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