Granular Hypothesis Research Articles

Granular origins of the Chinese business cycle

ABSTRACT Recent events in China, like Foxconn’s factory downsizing and Evergrande’s bankruptcy, have significantly impacted regional economies, highlighting how idiosyncratic shocks from large firms can generate aggregate effects. Using the ‘granular hypothesis’, which posits a significant impact of large firms’ actions on the macroeconomy, this study investigates how idiosyncratic shocks from large Chinese firms affect regional productivity growth and markups. Our findings demonstrate that idiosyncratic shocks to the 100 largest firms per province significantly impact regional labour productivity and total factor productivity growth but not gross regional domestic product growth. Subsequently, we examine how idiosyncratic shocks impact product market distortions, revealing that idiosyncratic shocks to large firms increase markups in regional markets, suggesting amplified market power.

Granular Cities

This study extends the concept of granularity from firms to cities, examining how large cities influence national economic dynamics beyond their relative size. By applying Zipf’s law, which describes the power law distribution of city sizes, we investigate the interplay between granularity and business cycles. Our aim is to test the granular hypothesis that large cities have a significant impact on the business cycle beyond their relative size. We analyze data from American and Brazilian cities between 2003 and 2019 assessing the granular residuals and their explanatory power. Our findings reveal that in the United States, the granular city size is three metropolitan areas or five counties when redefined. In Brazil, it equates to three municipalities. These results emphasize the substantial role large cities play in national economic fluctuations, suggesting that policy interventions that target infrastructure, education, and innovation in major urban centers could have widespread economic benefits. This paper’s contribution to the literature is to highlight a spatial component of granularity not considered so far.

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

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.

Granular Hypothesis on Stock Market

Granular Hypothesis on Stock Market

The determinants of aggregate fluctuations: The role of firm‐borrowing channels

The paper examines the empirical relationship between firm‐borrowing channels and aggregate fluctuations for the 100 largest US firms over 2000–2018. The motivation for this study originates from the general consensus in macroeconomics that microeconomic shocks to firms cannot generate significant aggregate fluctuations. The analysis extends Gabaix's 2011 baseline model by incorporating measures for “bank shocks” at the firm‐level. In addition to supporting the granular hypothesis, the econometric results indicate that bank shocks have a weak impact on GDP fluctuations, whereas non‐bank loans exert a strong impact on the same. The above findings survive certain robustness checks associated with the presence of oil and monetary shocks, as well as with the firms’ location factor.

Is the German labour market granular?

ABSTRACT This paper is the first to investigate the relevance of the ‘granular hypothesis” proposed by Gabaix (Econometrica 2011) for employment growth. Using comprehensive data for Germany, we show that the establishment size distribution in terms of employment is indeed fat-tailed and that idiosyncratic shocks to large establishments explain a substantial portion of aggregate employment change. This relationship is more pronounced in the manufacturing than the service sector. Our findings may be an argument for stabilizing the largest establishments when hit by negative idiosyncratic shocks, since their employment fluctuations could spill over to aggregate employment growth.

A Granular View of the Australian Business Cycle

We provide evidence supporting the hypothesis that idiosyncratic firm‐level shocks are important drivers of the Australian business cycle (granular hypothesis). We first document that the distribution of firm size in Australia is substantially asymmetric and follows a power‐law distribution with a long right tail. We then show that labour productivity shocks to the largest non‐financial firms in Australia account for about 20–40 per cent of the variation in Australian GDP growth over the period 2000–18. Besides energy sector firms, firms in the construction, transportation and consumer services sectors appear to be relevant drivers of GDP growth.

On the determination of the granular size of the economy

Introducing the granular hypothesis, Gabaix (2011) shows that the idiosyncratic shocks of a few “granular” firms account for a significant fraction of aggregate fluctuations of the US business cycle. In the literature, however, the question of how many are the granular firms in an economy is left unanswered. Using Spanish data, in this paper we propose a novel methodology to calibrate the granular size of the economy, i.e. the number of granular firms.

Granularity of the top 1,000 Brazilian companies

“Granularity” refers to the fact that economies are populated by a few large companies (the big “grains”) that coexist with many smaller companies. Such a distribution of firm sizes is modeled by power laws. This study adds to the international evidence of the granularity hypothesis by considering data for the top 1,000 Brazilian companies. We sort the companies from top to bottom in terms of their net revenues. Then, we adjust power laws to the data and estimate Pareto and Gumbel exponents. We find we cannot dismiss the hypothesis of granularity for the Brazilian companies. We also find the Pareto exponent is approximately one (1.070 ± .015), roughly a Zipf’s law. Such a result is in line with the previous one found for American companies where the Pareto exponent = 1.059. We also find a power-law progress curve best fits the data.

Are Firm-Level Idiosyncratic Shocks Important for U.S. Aggregate Volatility?

This paper quantitatively assesses whether firm-specific shocks can drive the U.S. business cycle. Firm-specific shocks to the largest firms can directly contribute to aggregate fluctuations whenever the firm size distribution is fat-tailed giving rise to the granular hypothesis. I use a novel, comprehensive data set compiled from administrative sources that contains the universe of firms and trade transactions, and find that the granular hypothesis accounts at most for 16 percent of the variation in aggregate sales growth. This is about half of that found by previous studies that imposed Gibrat’s law where all firms are equally volatile regardless of their size. Using the full distribution of growth rates among U.S. firms, I find robust evidence of a negative relationship between firm-level volatility and size, i.e. the size-variance relationship. The largest firms (whose shocks drive granularity) are the least volatile under the size-variance relationship, thus their influence on aggregates is mitigated. I show that by taking this relationship into account the effect of firm-specific shocks on observed macroeconomic volatility is substantially reduced. I then investigate several plausible mechanisms that could explain the negative sizevariance relationship. After empirically ruling out some of them, I suggest a “market power” channel in which large firms face smaller price elasticities and therefore respond less to a givensized productivity shock than small firms do. I provide direct evidence for this mechanism by estimating demand elasticities among U.S. manufactures. Lastly, I construct an analytically tractable framework that is consistent with several empirical regularities related to firm size.

Granular Sources of the Italian Business Cycle

A recent strand of literature has investigated the granular sources of the business cycle, i.e. to what extent firm-level dynamics have an impact on aggregate fluctuations. From a conceptual point of view, in the presence of fat-tailed firm-size distributions, shocks to large firms may not average out and may then have a direct effect on aggregate fluctuations; in addition, firm-to-firm linkages can propagate shocks to individual firms, leading to movements at the aggregate level. Using Cerved and INPS data, we test the granular hypothesis on a large sample of Italian firms, covering the period 1999-2014. Idiosyncratic Total Factor Productivity (TFP) shocks are found to explain around 30 per cent of aggregate TFP volatility; furthermore, the contribution of these linkages to firm-specific aggregate volatility is more important than that of the direct effect, especially for the manufacturing sector.

Aggregate fluctuations and the effect of large corporations: Evidence from Finnish monthly data

We investigate whether the granular hypothesis holds for the Finnish economy. In particular, we test if a sizable share of macroeconomic fluctuations is generated by firm-specific shocks to sales and productivity. We examine monthly firm-level data and find that the idiosyncratic shocks affecting large corporations explain around a third of business cycle fluctuations. This fact holds true both when we use the cross-sectional averages of sales and the estimated common factors, to control for common shocks. Moreover, we observe that the largest four corporations are the main drivers of this result. Finally, we detect a clear break in this relationship coinciding with the Great Recession. In particular, from 2010 onward the firm-level shocks lose their explanatory power. The findings of this paper point toward the importance of studying the granular hypothesis in a dynamic context, taking into account the possibility of breaks.

A Reading Model from the Perspective of Japanese Orthography: Connectionist Approach to the Hypothesis of Granularity and Transparency

This study presents a computer simulation model of reading in Japanese syllabic kana and morphographic kanji. The model was based on the simulation model developed by Harm and Seidenberg for reading in English. The purpose of building the current model was to verify the validity of the hypothesis of granularity and transparency (HGT) postulated by Wydell and Butterworth, focusing on the granularity dimension. The HGT was developed in order to explain the behavioral dissociation between excellent reading skills in Japanese and poor reading skills in English of an English–Japanese bilingual individual as well as the relatively low incidence of developmental dyslexia in Japan. The current model was successful in simulating the granularity dimension of the HGT. The study also identified several limitations, which need to be addressed in future research.

Microeconomic shocks and macroeconomic fluctuations in a dynamic network economy

The distribution of firm-sizes in the U.S. – or at least its upper tail – appears to be well-described by a Pareto distribution with infinite variance. This fact forms the basis of the granular hypothesis proposed by Gabaix in his paper “The Granular Origins of Aggregate Fluctuations” (Econometrica, (2011)). The granular hypothesis provides a mechanism whereby independent firm-level shocks are capable of generating macroeconomic fluctuations. This paper considers the granular hypothesis in a new framework. It develops a DSGE model by superimposing a stochastic overlapping generations framework on a network. Idiosyncratic output shocks to individual firms are transmitted across the economy through income–expenditure channels. Specifically, firms represent vertices of the network, and a firm x is linked to another firm y if x employs one or more workers who purchase commodities produced by y. The paper’s findings agree closely with results first discovered by Gabaix: if firm-sizes in an economy are described by a Pareto distribution, then independent firm-level shocks can generate macroeconomic fluctuations in accordance with the granular hypothesis. Furthermore, the model is capable of generating aggregate volatility of the same order of magnitude as occurs in reality. Thus the paper describes a new general equilibrium framework where macroeconomic fluctuations can arise as the consequence of independent firm-level shocks.

Can Idiosyncratic Shocks to Firms Explain Macroeconomic Growth and Fluctuations in Korea

This paper examines whether idiosyncratic firm-level shocks can explain an important part of aggregate movements as in Gabaix (2011). Its findings show that, different from the case in the United States, the idiosyncratic movements of the largest 20 firms in Korea appear to explain up to 18% of the variations in output growth between 1981 and 2011. In addition, they are also useful in explaining the cyclical component of GDP. It is found that the top three firms’ movements account for 58% of the cyclical component of GDP during the period from 2001q1 to 2012q3. This empirical evidence suggests that the granular hypothesis also holds in Korea.

Firm Dynamics and the Origins of Aggregate Fluctuations

What drives aggregate fluctuations? I test the granular hypothesis, according to which the largest firms in the economy drive aggregate dynamics, by estimating a dynamic factor model with firm-level data and controlling for the propagation of firm-level shocks using a multi-firm growth model. Each time series, the growth rate of sales of a specific firm, is decomposed in an unobserved common macroeconomic component and in a residual that I interpret as an idiosyncratic firm-level component. The empirical results suggest that, once I control for aggregate shocks, idiosyncratic shocks do not explain much of U.S. GDP growth fluctuations.

Firm dynamics and the origins of aggregate fluctuations

What drives aggregate fluctuations? I test the granular hypothesis — according to which the largest firms in the economy drive aggregate dynamics — by estimating a dynamic factor model with firm-level data. The growth rate of a firm׳s sales is decomposed in an unobserved common macroeconomic component and in a residual that I interpret as an idiosyncratic firm-level component. The empirical results show that, after properly controlling for aggregate shocks, idiosyncratic shocks have little role in explaining U.S. business cycle fluctuations.

Firm Dynamics and the Origins of Aggregate Fluctuations

What drives aggregate fluctuations? I test the granular hypothesis, according to which the largest firms in the economy drive aggregate dynamics, by estimating a dynamic factor model with firm-level data and controlling for the propagation of firm-level shocks using multi-firm growth model. Each time series, the growth rate of sales of a specific firm, is decomposed in an unobserved common macroeconomic component and in a residual that I interpret as an idiosyncratic firm-level component. The empirical results suggest that, once I control for aggregate shocks, idiosyncratic shocks do not explain much of U.S. GDP growth fluctuations.

Tail Risk Dynamics in Stock Returns: Links to the Macroeconomy and Global Markets Connectedness

We propose a new time-varying peaks over threshold model to study tail risk dynamics in equity markets: the laws of motion for the parameters are defined through the score-based approach. We apply the model to daily returns from U.S. size-sorted decile stock portfolios and show that large firms’ tail risk increases during recessions more than small firms’ tail risk. Our results are consistent with the granular hypothesis of aggregate fluctuations, and we quantify the impact of large firms’ tail risk shocks on the economy. A measure of tail connectedness is proposed: evidence from international equity markets shows that tail connectedness increases during periods of turmoil.This paper was accepted by Lauren Cohen, finance.

Can large cities explain the aggregate movements of economies? Testing the ‘granular hypothesis’ for US counties

The concentration of economic activity across space is a stylized fact of the literature in regional and urban economics. In the case of the United States (US), only 35 counties at the top of the distribution, out of a total of 3,138, generate more than one third of the country’s total personal income. Furthermore, US urban structure follows Zipf’s law. Under these conditions of concentration, we should presumably find some kind of granular hypothesis as suggested by Gabaix (Econometrica 79(3):733–772, 2011). This hypothesis means that the idiosyncratic behavior of the large units should be capable of explaining a significant part of the aggregate shocks. Gabaix found evidence to corroborate this hypothesis for firms: the idiosyncratic movements of the 100 largest firms in the US appear to explain about one third of the variations in output growth. In this paper we analyze whether this behavior is present in the case of urban concentration, as can be expected taking into account the degree of spatial concentration in the economy. We use data from the Bureau of Economic Analysis on personal income, which is disaggregated at a local level, US counties, from 1969 to 2011. The granular residual of the largest cities is calculated and used to explain the US aggregate economic evolution. The overall results provide support for the granular hypothesis: the idiosyncratic shocks to the top counties can explain a significant fraction of the volatility of US aggregate data.