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Firm Dynamics and the Granular Hypothesis

Author

Listed:
  • Basile Grassi

    (University of Oxford)

  • Vasco Carvalho

    (University of Cambridge and CREi)

Abstract

Building on the standard firm dynamics setup of Hopenhayn (1992), we develop a quantitative theory of aggregate fluctuations arising from idiosyncratic shocks to firm level productivity. This allows us to generalize the theoretical results in Gabaix (2011) to account for persistent micro-level shocks, optimal size decisions as well as endogenous firm entry and exit. We then use our model to provide a quantitative evaluation of Gabaix's "granular hypothesis" and find that it yields aggregate fluctuations of the same order of magnitude as a standard representative-firm real business cycle model. A calibration of our model to the US economy with a large number of firms leads to sizable aggregate fluctuations: the standard deviation of aggregate TFP (respectively output) is 0.8% (respectively 1.7%). We use this calibration to explore firms' comovement over the business cycle. The model predicts that the differential growth between large and small firms is pro-cyclical as it is in the data.

Suggested Citation

  • Basile Grassi & Vasco Carvalho, 2015. "Firm Dynamics and the Granular Hypothesis," 2015 Meeting Papers 617, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:617
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    References listed on IDEAS

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    Cited by:

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    4. Jean Imbs & Basile Grassi, 2015. "Why Do Risky Sectors Grow Fast?," 2015 Meeting Papers 449, Society for Economic Dynamics.
    5. Emil Siriwardane & Bernard Herskovic & Andrea Eisfeldt, 2016. "Risk Reallocation in OTC Derivatives Networks," 2016 Meeting Papers 538, Society for Economic Dynamics.

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