skip to content

The Cambridge-INET Institute - continuing as the Janeway Institute

WP Cover

Carvalho, V. M. and Grassi, B.

Large Firm Dynamics and the Business Cycle

WP Number: 1513

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.

Keywords: Large Firm Dynamics, Firm Size Distribution, Random Growth, Aggregate Fluctuations

JEL Codes: D21 D22 D24 E32 L11

Author links: Vasco Carvalho  

PDF: wp1513.pdf

Open Access Link: 10.17863/CAM.5787

Theme: transmission

Published Version of Paper: Large Firm Dynamics and the Business Cycle, Carvalho, V. M. and Grassi, B., American Economic Review (2019)