Large Firm Dynamics and the Business Cycle
Vasco M. Carvalho, Basile Grassi
American Economic Review · 2019 · Volume 109 · Issue 4
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.
Keywords
Firm Behavior: Theory, Firm Behavior: Empirical Analysis, Production, Cost, Capital, Total Factor, and Multifactor Productivity, Capacity, Business Fluctuations, Cycles, Pricing, and Market Structure, Size Distribution of Firms
Enable JavaScript for citation tools and additional paper interactions.