The Granular Origins of Aggregate Fluctuations


  • Xavier Gabaix

    1. Stern School of Finance, New York University, 44 West 4th Street, Suite 9-190, New York, NY 10012, U.S.A. and CEPR and NBER;
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    • For excellent research assistance, I thank Francesco Franco, Jinsook Kim, Farzad Saidi, Heiwai Tang, Ding Wu, and, particularly, Alex Chinco and Fernando Duarte. For helpful comments, I thank the co-editor, four referees, and seminar participants at Berkeley, Boston University, Brown, Columbia, ECARES, the Federal Reserve Bank of Minneapolis, Harvard, Michigan, MIT, New York University, NBER, Princeton, Toulouse, U.C. Santa Barbara, Yale, the Econometric Society, the Stanford Institute for Theoretical Economics, and Kenneth Arrow, Robert Barsky, Susanto Basu, Roland Bénabou, Olivier Blanchard, Ricardo Caballero, David Canning, Andrew Caplin, Thomas Chaney, V. V. Chari, Larry Christiano, Diego Comin, Don Davis, Bill Dupor, Steve Durlauf, Alex Edmans, Martin Eichenbaum, Eduardo Engel, John Fernald, Jesus Fernandez-Villaverde, Richard Frankel, Mark Gertler, Robert Hall, John Haltiwanger, Chad Jones, Boyan Jovanovic, Finn Kydland, David Laibson, Arnaud Manas, Ellen McGrattan, Todd Mitton, Thomas Philippon, Robert Solow, Peter Temin, Jose Tessada, and David Weinstein. I thank for NSF (Grant DMS-0938185) for support.


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.