This paper proposes that idiosyncratic firm-level shocks can explain an important
part of aggregate movements and provide a microfoundation for aggregate shocks. Ex-
isting research has focused on using aggregate shocks to explain business cycles, argu-
ing that individual firm shocks average out in the aggregate. I show that this argument
breaks down if the distribution of firm sizes is fat-tailed, as documented empirically.
The idiosyncratic movements of the largest 100 firms in the United States appear to
explain about one-third of variations in output growth. This “granular” hypothesis sug-
gests new directions for macroeconomic research, in particular that macroeconomic
questions can be clarified by looking at the behavior of large firms. This paper’s ideas
and analytical results may also be useful for thinking about the fluctuations of other
economic aggregates, such as exports or the trade balance.
