Firm Dynamics and the Granular Hypothesis

Basile Grassi and Vasco Carvalho

No 617, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: Building on the standard firm dynamics setup of Hopenhayn (1992), we develop a quantitative theory of aggregate fluctuations arising from idiosyncratic shocks to firm level productivity. This allows us to generalize the theoretical results in Gabaix (2011) to account for persistent micro-level shocks, optimal size decisions as well as endogenous firm entry and exit. We then use our model to provide a quantitative evaluation of Gabaix's "granular hypothesis" and find that it yields aggregate fluctuations of the same order of magnitude as a standard representative-firm real business cycle model. A calibration of our model to the US economy with a large number of firms leads to sizable aggregate fluctuations: the standard deviation of aggregate TFP (respectively output) is 0.8% (respectively 1.7%). We use this calibration to explore firms' comovement over the business cycle. The model predicts that the differential growth between large and small firms is pro-cyclical as it is in the data.

Date: 2015
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:617

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