Aggregate Fluctuations and the Cross-sectional Dynamics of Firm Growth

This paper argues that important insights into the business cycle can be obtained by exploring the micro-structure of macroeconomic fluctuations. We fit firm-level growth data with the Asymmetric Exponential Power density, which accounts for asymmetric dispersion and kurtosis on either side of the modal rate. Three novel results are reported. First, firms in the left side of the distribution, that is firms that are growing more slowly or declining, are typically more responsive to aggregate shocks than those in the right side of the distribution. Second, trending behavior in the volatility of firm growth is predominantly driven by increasing dispersion in the growth of highly performing firms. Last, we deliver evidence in support of the view that shifts in the probability mass on either side of the mode may act as important propagators of business fluctuations. The analysis points to financial frictions as one of the mechanisms capable of inducing non-linear micro adjustment consistent with both aggregate and cross-sectional dynamics.