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Large Firm Dynamics and the Business Cycle

Listed author(s):
  • Vasco M. Carvalho
  • Basile Grassi

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.

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File URL: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1556.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1556.

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Date of creation: 30 Apr 2016
Handle: RePEc:cam:camdae:1556
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Contact details of provider: Web page: http://www.econ.cam.ac.uk/

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