Working Paper: NBER ID: w15286
Authors: Xavier Gabaix
Abstract: This paper proposes that idiosyncratic firm-level fluctuations can explain an important part of aggregate shocks, and provide a microfoundation for aggregate productivity shocks. Existing research has focused on using aggregate shocks to explain business cycles, arguing that individual firm shocks average out in aggregate. I show that this argument breaks down if the distribution of firm sizes is fat-tailed, as documented empirically. The idiosyncratic movements of the largest 100 firms in the US appear to explain about one third of variations in output and the Solow residual. This "granular" hypothesis suggests new directions for macroeconomic research, in particular that macroeconomic questions can be clarified by looking at the behavior of large firms. This paper's ideas and analytical results may also be useful to think about the fluctuations of other economic aggregates, such as exports or the trade balance.
Keywords: aggregate fluctuations; idiosyncratic shocks; business cycles; granular hypothesis
JEL Codes: E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| idiosyncratic shocks to large firms (E32) | aggregate volatility (E10) |
| idiosyncratic shocks to large firms (E32) | GDP fluctuations (F44) |
| idiosyncratic shocks to large firms (E32) | granular residual (L72) |
| granular residual (L72) | growth rate of GDP (O40) |
| fat-tailed distribution of firm sizes (D39) | idiosyncratic shocks do not average out (E32) |
| economic activities of large firms (D22) | aggregate fluctuations (E10) |