Macro Seminar - Stephen Terry (University of Michigan)

About

Abstract: Idiosyncratic shocks shape firm decisions and the value functions they maximize. Using a comprehensive firm-level dataset, we document significant departures from the widely assumed Gaussian AR(1) stochastic process, including fat-tailed, leptokurtic revenue transitions and lower persistence in the tails. This discrepancy has two key implications. First, these dynamics flatten the revenue-to-value mapping and create a more clustered firm value distribution. Second, solving a canonical general equilibrium heterogeneous firm dynamics model nonparametrically to align with these observed empirical patterns reveals a first-order quantitative impact on the economy’s responsiveness to aggregate shifts. Accurately modeling firm-level shocks is imperative for macroeconomics.