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Staff Reports

Nonlinear Firm Dynamics

Number 1088
March 2024 Revised October 2024

JEL classification: D22, E23, E32

Authors: Davide Melcangi and Silvia Sarpietro

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, mostly unexplained by observable factors, and follow a nonlinear stochastic process, thus departing from the canonical linear AR(1). 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 the role these features play in achieving empirically plausible volatility and persistence of micro-originated (granular) aggregate fluctuations.

Full Article

Author Disclosure Statement(s)

Davide Melcangi
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

Silvia Sarpietro
The author declares that she has no relevant or material financial interests that relate to the research described in this paper.

Suggested Citation:
Melcangi, Davide and Silvia Sarpietro. 2023. “Nonlinear Firm Dynamics.” Federal Reserve Bank of New York Staff Reports, no. 1088, March. https://doi.org/10.59576/sr.1088

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