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Cross-Sectional Heterogeneity and the Persistence of Aggregate Fluctuations

  • Michelacci, C.

It is well known from time series analysis that shocks to aggregate output have very persistent effects. This paper argues that the relation between the expected growth rate of a firm and its size\ provides a microfoundation for such aggregate persistence. The empirical evidence indicates that small firms grow faster than big ones. If this is true, a shock that reallocates units across sizes will be absorbed, yet at very low decreasing rates. Once the shock hits the system, firms are reallocated across sizes. If small firms grows faster than big ones, the shock will then be absorbed. However, fast growing small firms eventually become big and grow as big firms. Thus the number of small firms shrinks over time as well as the rate at which the shock is absorbed. This transmission mechanism reconciles the micro evidence with the observed degree of aggregate persistence. It requires changes in neither the number of firms in the market nor the rate of technological progress. It is merely the result of the cross-sectional heterogeneity that we observe in real economies.

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Paper provided by Centro de Estudios Monetarios Y Financieros- in its series Papers with number 9906.

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Length: 46 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:fth:cemfdt:9906
Contact details of provider: Postal: Centro de Estudios Monetarios Y Financieros. Casado del Alisal, 5-28014 Madrid, Spain.
Phone: 914290551
Fax: 914291056
Web page: http://www.cemfi.es/
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  1. John Sutton, 1997. "Gibrat's Legacy," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 40-59, March.
  2. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1994. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," NBER Working Papers 4887, National Bureau of Economic Research, Inc.
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  6. Caballero, R.J. & Engel, E.M.R.A., 1990. "Dynamic (S,S) Economies," Discussion Papers 1990_44, Columbia University, Department of Economics.
  7. Jovanovic, Boyan & Nyarko, Yaw, 1996. "Learning by Doing and the Choice of Technology," Econometrica, Econometric Society, vol. 64(6), pages 1299-1310, November.
  8. Liudas Giraitis & Peter M Robinson & Alexander Samarov, 1997. "Rate Optimal Semiparametric Estimation of the Memory Parameter of the Gaussian Time Serieswith Long-Range Dependence - (Now published in 'Journal of Time Series Analysis', 18 (1997), pp.49-60.)," STICERD - Econometrics Paper Series /1997/323, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  9. Blundell, Richard & Griffith, Rachel & van Reenen, John, 1999. "Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 529-54, July.
  10. Dunne, Timothy & Roberts, Mark J & Samuelson, Larry, 1989. "The Growth and Failure of U.S. Manufacturing Plants," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 671-98, November.
  11. Lewis, Mervyn K. & Mizen, Paul D., 2000. "Monetary Economics," OUP Catalogue, Oxford University Press, number 9780198290629.
  12. Velasco, Carlos, 2000. "Non-Gaussian Log-Periodogram Regression," Econometric Theory, Cambridge University Press, vol. 16(01), pages 44-79, February.
  13. Jones, Robert & Newman, Geoffrey, 1995. "Adaptive Capital, Information Depreciation and Schumpeterian Growth," Economic Journal, Royal Economic Society, vol. 105(431), pages 897-915, July.
  14. Caballero, Ricardo J & Engel, Eduardo M R A & Haltiwanger, John, 1997. "Aggregate Employment Dynamics: Building from Microeconomic Evidence," American Economic Review, American Economic Association, vol. 87(1), pages 115-37, March.
  15. Velasco, Carlos, 1999. "Non-stationary log-periodogram regression," Journal of Econometrics, Elsevier, vol. 91(2), pages 325-371, August.
  16. Michelacci, C. & Zaffaroni, P., 1998. "(Fractional) Beta Convergence," Papers 9803, Centro de Estudios Monetarios Y Financieros-.
  17. Bertola, G. & Caballero, R.J., 1990. "Kinked Adjustment Costs And Aggregate Dynamics," Discussion Papers 1990_20, Columbia University, Department of Economics.
  18. repec:cup:macdyn:v:2:y:1998:i:3:p:322-44 is not listed on IDEAS
  19. Ricardo J. Caballero & Mohamad L. Hammour, 1991. "The Cleansing Effect of Recessions," NBER Working Papers 3922, National Bureau of Economic Research, Inc.
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  22. Dale T. Mortensen & Christopher A. Pissarides, 1998. "Technological Progress, Job Creation and Job Destruction," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 733-753, October.
  23. Francis X. Diebold & Glenn D. Rudebusch, 1988. "Long memory and persistence in aggregate output," Finance and Economics Discussion Series 7, Board of Governors of the Federal Reserve System (U.S.).
  24. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
  25. Peter Howitt, 1999. "Steady Endogenous Growth with Population and R & D Inputs Growing," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 715-730, August.
  26. Aghion, Philippe & Saint-Paul, Gilles, 1998. "VIRTUES OF BAD TIMES Interaction Between Productivity Growth and Economic Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 2(03), pages 322-344, September.
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