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The Granular Origins of Aggregate Fluctuations

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Xavier Gabaix

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15286.

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Date of creation: Aug 2009
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Handle: RePEc:nbr:nberwo:15286

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Andrew T. Foerster & Pierre-Daniel G. Sarte & Mark W. Watson, 2008. "Sectoral vs. aggregate shocks : a structural factor analysis of industrial production," Working Paper 08-07, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  2. Steven J. Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2006. "Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms," NBER Working Papers 12354, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Claudia Canals & Xavier Gabaix & Josep M. Vilarrubia & David Weinstein, 2007. "Trade patterns, trade balances and idiosyncratic shocks," Banco de España Working Papers 0721, Banco de España. [Downloadable!]
  4. Laura Veldkamp & Justin Wolfers, 2006. "Aggregate Shocks or Aggregate Information? Costly Information and Business Cycle Comovement," Working Papers 06-12, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
    Other versions:
  5. Erzo G.J. Luttmer, 2007. "New goods and the size distribution of firms," Working Papers 649, Federal Reserve Bank of Minneapolis. [Downloadable!]
  6. repec:att:wimass:192055 is not listed on IDEAS
  7. Erzo G.J. Luttmer, 2006. "Consumer search and firm growth," Working Papers 645, Federal Reserve Bank of Minneapolis. [Downloadable!]
  8. Döpke, J. & Funke, M. & Holly, S. & Weber, S., 2008. "The Cross-Section of Output and Inflation in a Dynamic Stochastic General Equilibrium Model with Sticky Prices," Cambridge Working Papers in Economics 0853, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  9. Julian di Giovanni & Andrei A. Levchenko, 2006. "Trade Openness and Volatility," Development Working Papers 219, Centro Studi Luca d\'Agliano, University of Milano. [Downloadable!]
    Other versions:
  10. Ishikawa, Atushi, 2009. "Power-Law and Log-Normal Distributions in Temporal Changes of Firm-Size Variables," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(11), pages 1-25. [Downloadable!]
  11. Hideaki Aoyama & Hiroshi Yoshikawa & Hiroshi Iyetomi & Yoshi Fujiwara, 2008. "Productivity Dispersion: Facts, Theory, and Implications," Quantitative Finance Papers 0805.2792, arXiv.org. [Downloadable!]
  12. Diego Comin & Sunil Mulani, 2007. "A theory of growth and volatility at the aggregate and firm level," Proceedings, Federal Reserve Bank of San Francisco, issue Nov. [Downloadable!]
    Other versions:
  13. Charles I. Jones, 2008. "Intermediate Goods, Weak Links, and Superstars: A Theory of Economic Development," NBER Working Papers 13834, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Owen Irvine & Scott Schuh, 2007. "The roles of comovement and inventory investment in the reduction of output volatility," Proceedings, Federal Reserve Bank of San Francisco, issue Nov. [Downloadable!]
  15. Carolina Castaldi & Sandro Sapio, 2008. "Growing like mushrooms? Sectoral evidence from four large European economies," Journal of Evolutionary Economics, Springer, vol. 18(3), pages 509-527, August. [Downloadable!] (restricted)
  16. Gersbach, Hans & Hahn, Volker, 2008. "Monetary Policy Inclinations," CEPR Discussion Papers 6761, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  17. Satyajit Chatterjee & Esteban Rossi-Hansberg, 2008. "Spinoffs and the market for ideas," Working Papers 08-26, Federal Reserve Bank of Philadelphia. [Downloadable!]
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