Large Firm Dynamics and Secular Stagnation: Evidence from Japan and the U.S

Focusing on the recent secular stagnation debate, this paper examines the role of large firm dynamics as determinants of productivity fluctuations. We first show that idiosyncratic shocks to large firms as well as entry, exit, and reallocation effects account for 30 to 40 percent of productivity fluctuations in Japan and the U.S. Second, since the mid-2000s, the slowdown in large foreign firm entry into the U.S. has led to a decline in business dynamics and downward pressures on productivity growth. Third, we identify demand and supply shocks by matching idiosyncratic large-firm shocks in the granular residual (Gabaix, 2011) and changes in sectoral inflation rates and show that the prolonged slowdown in productivity growth in Japan and the U.S. was mostly driven by supply shocks. Overall, our results support the supply-side views of Gordon (2012, 2015, 2016) in the secular stagnation debate.