Abstract: When large firms represent a disproportionate share of the economy, business cycles may be governed by idiosyncratic shocks to these large firms. We show – theoretically - in a standard firm dynamics setting (Hopenhayn, 1992) with a finite number of firms, each subject to persistent idiosyncratic productivity shocks, that this “granular hypothesis” (Gabaix 2011) leads to substantial aggregate fluctuations. A fat-tailed distribution of firm size arises because of large entrants and persistent shocks. The model, calibrated to the US economy with a large number of firms, generates fluctuations of aggregate TFP (respectively output) of 1.1% (respectively 2.3%). The structure of the model allows us to study the micro and macro impact of a shock on the largest firm. Such a shock is contractionary at the aggregate level and expansionary at the idiosyncratic level. The conditional prediction of the model on firms’ co-movement shows that the differential growth between large and small firms is pro-cyclical as it is in the data.
Publication Year: 2013
Publication Date: 2013-01-01
Language: en
Type: preprint
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Cited By Count: 1
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