The Granular Origins of Aggregate Fluctuations

This paper proposes that idiosyncratic firm-level shocks can explain an important part of aggregate movements and provide a microfoundation for aggregate shocks. Existing research has focused on using aggregate shocks to explain business cycles, arguing that individual firm shocks average out in the...

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Bibliographic Details
Published in:Econometrica 2011-05, Vol.79 (3), p.733-772
Main Author: Gabaix, Xavier
Format: Article
Language:English
Subjects:
Aggregate demand
Aggregates
Applications
Big business
Business cycle
Business cycles
Business structures
Distribution theory
Econometrics
Economic activity
Economic conditions
Economic fluctuations
Economic forecasts
Economic growth rate
Economic indicators
Economic shock
Economic theory
Economics
Exact sciences and technology
granular residual
Gross domestic product
idiosyncratic shocks
Insurance, economics, finance
Macroeconomic modeling
Macroeconomics
Mathematical analysis
Mathematics
Microeconomics
Output
Output rate
Partial differential equations
Probability and statistics
Probability theory and stochastic processes
Production level
Productivity
Sciences and techniques of general use
Size of enterprise
Solow residual
Statistics
Studies
Citations: Items that cite this one
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Summary:This paper proposes that idiosyncratic firm-level shocks can explain an important part of aggregate movements and provide a microfoundation for aggregate shocks. Existing research has focused on using aggregate shocks to explain business cycles, arguing that individual firm shocks average out in the 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 United States appear to explain about one-third of variations in output growth. 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 for thinking about the fluctuations of other economic aggregates, such as exports or the trade balance.
ISSN:0012-9682
1468-0262
DOI:10.3982/ECTA8769