Impulsion or propagation? Large firms and the business cycle in a developing economy

The literature on the microeconomic origins of business cycles has notably shifted. Historically dominated by the diversification hypothesis, which posits that microeconomic factors are negligible in explaining business cycles, recent research increasingly favors the granularity hypothesis. This perspective emphasizes the significant role of large firms in driving business cycles, particularly in developed economies. However, whether large firms exert a similar influence in developing countries remains unclear. This paper addresses this gap by examining two firm-level datasets from Morocco. Our findings indicate that while idiosyncratic shocks to large firms contribute significantly to aggregate sales, they do not appear to be central drivers of the overall business cycle. On the contrary, the business cycle in Morocco is more closely linked to economy-wide shocks than to those originating from firms, including even the largest among them. More specifically, the latter, at the economy-wide level, are found to primarily transmit external shocks, particularly commodity price shocks. Thus, large firms in Morocco contribute more to the propagation of shocks than to their impulsion. This underscores the need for economic policy to support their productivity with the aim of fostering the country’s economic growth.