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 percent of U.S. aggregate fluctuations; establishing a lower bound for the role of granularity in the U.S. economy.