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Cross-Sectional Heterogeneity and the Persistence of Aggregate Fluctuations

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  • Michelacci, Claudio

Abstract

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4302.

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Date of creation: Mar 2004
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Handle: RePEc:cpr:ceprdp:4302

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Keywords: gibrat's law; long memory; vintage models;

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Cited by:
  1. Paul Castillo & Diego Winkelried, 2007. "Dollarization Persistence and Individual Heterogeneity," Working Papers 2007-004, Banco Central de Reserva del Perú.
  2. Verspagen,Bart, 1999. "Intellectual Property Rights in the World Economy," Research Memoranda 016, Maastricht : MERIT, Maastricht Economic Research Institute on Innovation and Technology.
  3. Dolado, Juan José & Gonzalo, Jesús & Mayoral, Laura, . "What is What?: A Simple Time-Domain Test of Long-memory vs. Structural Breaks," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/3239, Universidad Carlos III de Madrid.
  4. Marc Henry & Paolo Zaffaroni, 2002. "The long range dependence paradigm for macroeconomics and finance," Discussion Papers 0102-19, Columbia University, Department of Economics.
  5. Silverberg, G. & Verspagen, Bart, 1999. "Long Memory in Time Series of Economic Growth and Convergence," Eindhoven Center for Innovation Studies (ECIS) working paper series 99.8, Eindhoven Center for Innovation Studies (ECIS).
  6. Zaffaroni, Paolo, 2004. "Contemporaneous aggregation of linear dynamic models in large economies," Journal of Econometrics, Elsevier, vol. 120(1), pages 75-102, May.
  7. Samaniego, Roberto M., 2006. "Organizational capital, technology adoption and the productivity slowdown," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1555-1569, October.

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