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Large Firm Dynamics and the Business Cycle

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  • Vasco Carvalho
  • Basile Grassi

Abstract

Do large firm dynamics drive the business cycle? We answer this question by developing a quantitative theory of aggregate fluctuations caused by firm-level disturbances alone. We show that a standard heterogeneous firm dynamics setup already contains in it a theory of the business cycle, without appealing to aggregate shocks. We offer a complete analytical characterization of the law of motion of the aggregate state in this class of models - the firm size distribution - and show that the resulting closed form solutions for aggregate output and productivity dynamics display: (i) persistence, (ii) volatility and (iii) time-varying second moments. We explore the key role of moments of the firm size distribution - and, in particular, the role of large firm dynamics - in shaping aggregate fluctuations, theoretically, quantitatively and in the data.

Suggested Citation

  • Vasco Carvalho & Basile Grassi, 2015. "Large Firm Dynamics and the Business Cycle," Working Papers 824, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:824
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    large firm dynamics; firm size distribution; random growth; aggregate fluctuations;
    All these keywords.

    JEL classification:

    • 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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