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Title: Large Firm Dynamics and the Business Cycle

Author(s): Vasco M Carvalho and Basile Grassi

Publication Date: May 2015

Keyword(s): aggregate fluctuations, firm size distribution, large firm dynamics and random growth

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Carvalho, V and Grassi, B. 2015. 'Large Firm Dynamics and the Business Cycle'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10587