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Firm Dynamics and the Origins of Aggregate Fluctuations

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Abstract

What drives aggregate fluctuations? I test the granular hypothesis, according to which the largest firms in the economy drive aggregate dynamics, by estimating a dynamic factor model with firm-level data and controlling for the propagation of firm-level shocks using multi-firm growth model. Each time series, the growth rate of sales of a specific firm, is decomposed in an unobserved common macroeconomic component and in a residual that I interpret as an idiosyncratic firm-level component. The empirical results suggest that, once I control for aggregate shocks, idiosyncratic shocks do not explain much of U.S. GDP growth fluctuations.

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  • Andrea Stella, 2015. "Firm Dynamics and the Origins of Aggregate Fluctuations," International Finance Discussion Papers 1133, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1133
    DOI: 10.17016/IFDP.2015.1133
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    More about this item

    Keywords

    Business Cycles; Firm Dynamics; Granular Residual; Dynamic Factor Models;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • D20 - Microeconomics - - Production and Organizations - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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