The Role of Granularity in the Variance and Tail Probability of Aggregate Output

Yoshiyuki Arata

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: Recent macroeconomic studies show that microeconomic shocks can be another source of aggregate fluctuations (the granular hypothesis). To test this idea, I study the micro-originated variance and tail probability of aggregate output implied by models in the literature (Acemoglu et al. (2012); Baqaee and Farhi (2019)). By giving the asymptotic behavior of the variance and the upper bound of the tail probability, I show that the micro-originated aggregate fluctuations are determined by the size of the largest firm. By using this result and firm-level data in Japan, I quantify the micro-originated variance and tail probability of aggregate output. I find that given the empirical heterogeneity of firm size in Japan, microeconomic shocks generate only small fluctuations of aggregate output (measured by the variance) but not a large deviation of aggregate output (measured by the tail probability).

Pages: 44 pages
Date: 2020-03
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:20027

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