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Cross-Sectional Heterogeneity and the Persistence of Aggregate Fluctuations

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Author Info
Michelacci, Claudio

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

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Find related papers by JEL classification:
C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Verspagen,Bart, 1999. "Intellectual Property Rights in the World Economy," Research Memoranda 016, Maastricht : MERIT, Maastricht Economic Research Institute on Innovation and Technology. [Downloadable!]
  2. Marc Henry & Paolo Zaffaroni, 2002. "The long range dependence paradigm for macroeconomics and finance," Discussion Papers 0102-19, Columbia University, Department of Economics. [Downloadable!]
  3. Juan J. Dolado & Jesús Gonzalo & Laura Mayoral, 2005. "What is What?: A Simple Time-Domain Test of Long-memory vs. Structural Breaks," Economics Working Papers 954, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  4. Silverberg, G. & Verspagen, Bart, 1999. "Long Memory in Time Series of Economic Growth and Convergence," ECIS Working Papers 99.8, Eindhoven Centre for Innovation Studies, Eindhoven University of Technology. [Downloadable!]
    Other versions:
  5. Paul Castillo & Diego Winkelried, 2005. "Dollarization Persistence and Individual Heterogeneity," Macroeconomics 0512014, EconWPA, revised 31 Dec 2005. [Downloadable!]
    Other versions:
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