Nonlinear Firm Dynamics

Abstract: This paper presents empirical evidence on the nature of idiosyncratic shocks to firms and discusses its role for firm behavior and aggregate fluctuations. We document that firm-level sales and productivity are hit by heavy-tailed shocks and follow a nonlinear stochastic process, thus departing from the canonical linear. We estimate a state-of-the-art model to flexibly capture the rich dynamics uncovered in the data and characterize the drivers of nonlinear persistence and non-Gaussian shocks. We show that these features are crucial to get empirically plausible volatility and persistence of micro-originated (granular) aggregate fluctuations.

Keywords: firm dynamics; productivity; nonlinearities; non-Gaussian shocks; granular fluctuations;

JEL Classification: D22; E23; E32;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2024-03-01

Number: 1088