Revisiting the Origins of Business Cycles With the Size-Variance Relationship

Abstract

Abstract This paper quantifies the importance of the granular channel for the U.S. economy by taking into account that large firms are less volatile than small firms, a feature also known as the size-variance relationship. Intuitively, the largest firms, whose shocks drive granularity, are the least volatile; thus, their influence on aggregates is mitigated. By imposing estimates from the universe of employers for the size-variance relationship in a simple, quantitative framework, I find that the granular hypothesis can rationalize 15% of U.S. aggregate fluctuations, establishing a lower bound for the role of granularity in the U.S. economy.

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