Cross-Sectional Heterogeneity and the Persistence of Aggregate Fluctuations
Claudio Michelacci ()
No 4302, CEPR Discussion Papers from C.E.P.R. Discussion Papers
The micro evidence indicates that small firms grow faster than big firms. I argue that this relationship between the expected growth rate of a firm and its size may provide a micro foundation for the well-known high degree of persistence of shocks to aggregate output. The logic goes as follows. Almost any shock tends to temporarily alter firms’ incentive to invest in growth thereby leading to a reallocation of firms across size categories. If small firms grow faster than big ones, the impact effect of the shock on aggregate output is gradually absorbed. But, as fast growing small firms become big and start to grow at the lower rate of big firms, the rate at which the shock is absorbed decreases over the adjustment path. As a result, shocks are absorbed, yet at a very low decreasing rate that induces long memory in aggregate output. I argue that this transmission mechanism may reconcile the micro evidence with the observed degree of aggregate persistence. It requires changes in neither the number of firms in the market nor the rate of technological progress. It is merely the result of the cross-sectional heterogeneity that we observe in real economies.
Keywords: gibrat's law; long memory; vintage models (search for similar items in EconPapers)
JEL-codes: C43 E10 E32 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ent and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed
Downloads: (external link)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at email@example.com
Journal Article: Cross-sectional heterogeneity and the persistence of aggregate fluctuations (2004)
Working Paper: Cross-Sectional Heterogeneity and the Persistence of Aggregate Fluctuations (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:4302
Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=4302
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().