Idiosyncratic Volatility Shocks and Aggregate Fluctuations: An Appraisal of the Spanish Case

Abstract

The aim of this work is to find empirical evidence, in case it exists, about the granularity of the Spanish economy. The Granular Hypothesis (Gabaix 2011) has been tested for Spain between the years 1990 and 2014. For this purpose I have used a sample made up 31477 firms, for which I have taken three variables for each company. These are: sales, number of employees and the SIC code. First, I show that the firm’s size distribution is fat tailed. This fact is essential in order to show that the idiosyncratic shocks do not cancel out. Therefore, the Law of Large Numbers does not apply in this case. Second, I calculate the granular residual in the sense of Gabaix (2011). The main result obtained is that the top 100 largest firms in Spain account for one third of the aggregate output variability, in line with the original result or Gabaix for american firms.