Working Paper

Firm Dynamics and the Origins of Aggregate Fluctuations

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.

Keywords: Business Cycles; Firm Dynamics; Granular Residual; Dynamic Factor Models;

JEL Classification: C30; D20; E32;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2015-04-22

Number: 1133

Pages: 51 pages