Financial fragility, heterogeneous agents, and aggregate fluctuations: evidence from a panel of US firms

Abstract

This paper describes an empirical study of the implications of agents' heterogeneity for theories of macroeconomic fluctuations based on the role of financial variables. Models of explicit distribution dynamics are applied to company account data from a panel of US manufacturing firms to investigate the dynamics of the entire crosssection distribution of firms' financial positions and the interactions with aggregate activity. It is found that the pattern of cyclical co-movements is consistent with models where aggregate fluctuations are endogenously and jointly determined with financial conditions. The dynamics of different parts of the leverage distribution contain significant predictive information for aggregate investment growth. The distribution dynamics reveal substantial intra-distribution mobility, although there is little evidence of significant interactions with aggregate economic activity. Intra-distribution mobility is higher for small firms than for large firms, and displays asymmetric patterns across business cycle phases.