Firm Dynamics and the Granular Hypothesis

  • Carvalho V
  • Grassi B
  • 16


    Mendeley users who have this article in their library.
  • N/A


    Citations of this article.


Building on the standard firm dynamics setup of Hopenhayn (1992), we develop a quan- titative theory of aggregate fluctuations arising from idiosyncratic shocks to firm level productivity. This allows us to generalize the theoretical results in Gabaix (2011) to ac- count for persistent micro-level shocks, optimal size decisions as well as endogenous firm entry and exit. We then use our model to provide a quantitative evaluation of Gabaix’s “granular hypothesis” and find that it yields aggregate fluctuations of the same order of magnitude as a standard representative-firm real business cycle model. A calibration of our model to the US economy with a large number of firms leads to sizable aggregate fluctuations: the standard deviation of aggregate TFP (respectively output) is 0.8% (re- spectively 1.7%). We use this calibration to explore firms’ comovement over the business cycle. The model predicts that the differential growth between large and small firms is pro-cyclical as it is in the data

Author-supplied keywords

  • aggre-
  • firm dynamics
  • firm size distribution
  • granular hypothesis

Get free article suggestions today

Mendeley saves you time finding and organizing research

Sign up here
Already have an account ?Sign in

Find this document

There are no full text links


  • Vasco Carvalho

  • Basile Grassi

Cite this document

Choose a citation style from the tabs below

Save time finding and organizing research with Mendeley

Sign up for free