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Cross-Sectional Heterogeneity and the Persistence of Aggregate Fluctuations

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  • Michelacci, C.

Abstract

It is well known from time series analysis that shocks to aggregate output have very persistent effects. This paper argues that the relation between the expected growth rate of a firm and its size\ provides a microfoundation for such aggregate persistence. The empirical evidence indicates that small firms grow faster than big ones. If this is true, a shock that reallocates units across sizes will be absorbed, yet at very low decreasing rates. Once the shock hits the system, firms are reallocated across sizes. If small firms grows faster than big ones, the shock will then be absorbed. However, fast growing small firms eventually become big and grow as big firms. Thus the number of small firms shrinks over time as well as the rate at which the shock is absorbed. This transmission mechanism reconciles 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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Bibliographic Info

Paper provided by Centro de Estudios Monetarios Y Financieros- in its series Papers with number 9906.

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Length: 46 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:fth:cemfdt:9906

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Keywords: ECONOMIC MODELS ; TIME SERIES ; STATISTICAL ANALYSIS;

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References

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Citations

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Cited by:
  1. 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).
  2. Winkelried, Diego & Castillo, Paul, 2010. "Dollarization persistence and individual heterogeneity," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1596-1618, December.
  3. Samaniego, Roberto M., 2006. "Organizational capital, technology adoption and the productivity slowdown," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1555-1569, October.
  4. Juan J. Dolado & Jesus Gonzalo & Laura Mayoral, 2005. "What is What? A Simple Time-Domain Test of Long-memory vs. Structural Breaks," Working Papers 258, Barcelona Graduate School of Economics.
  5. Zaffaroni, Paolo, 2004. "Contemporaneous aggregation of linear dynamic models in large economies," Journal of Econometrics, Elsevier, vol. 120(1), pages 75-102, May.

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