The effect of firms' size on business cycle

Abstract

In this paper I analyse the cross–correlation between the effects of firms´ size on the business cycle, a phenomenon called granularity. I follow Gabaix´s research which argues that idiosyncratic firm-level shocks can explain an important part of aggregate movements and provide a microfoundation for aggregate shocks. The variable used in my research is the operating revenue. I consider this variable as a proxy of firms' size. Furthermore, the aggregate volatility of GDP is determined by the volatility of operating revenue of large firms. Hence, I can predict the GDP volatility via the operating revenue fluctuations of large firms. This paper shows that the forces of randomness at micro level create an inexorable amount of volatility at macro level.