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.
Download Info
To our knowledge, this item is not available for
download. To find whether it is available, there are three
options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page
whether it is in fact available.
3. Perform a search for a similarly titled item that would be
available.
Publisher Info
Paper provided by Centro de Estudios Monetarios Y Financieros- in its series Papers with number
9906.
Length: 46 pages Date of creation: 1999 Date of revision: Handle: RePEc:fth:cemfdt:9906
Contact details of provider: Postal: Centro de Estudios Monetarios Y Financieros. Casado del Alisal, 5-28014 Madrid, Spain. Phone: 914290551 Fax: 914291056 Email: Web page: http://www.cemfi.es/ More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: (Thomas Krichel).
Find related papers by JEL classification: C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation E1 - Macroeconomics and Monetary Economics - - General Aggregative Models 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
References listed on IDEAS 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.:
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.)