Federal Reserve Bank of Richmond

08/02/2021 | Press release | Distributed by Public on 08/02/2021 09:05

Richmond Fed Research Examines Whether Large Firms Can Drive Business Cycles

Aug. 2, 2021

Richmond Fed Research Examines Whether Large Firms Can Drive Business Cycles

Contrary to the traditional view, adverse events for a single firm can affect the economy as a whole, if the firm is large enough. But this effect has been overstated for the U.S. economy in recent literature, according to the latest Economic Brief from the Richmond Fed.

Economist Chen Yeh discussed the granular hypothesis, which says a handful of large firms can drive the business cycle. While previous studies found that the granular hypothesis could rationalize 35 percent of U.S. aggregate fluctuations, Yeh accounted for differing volatility among firms of differing sizes and found that the percentage was closer to about 15 percent. Hence, the granular hypothesis plays a meaningful role for the U.S. economy, but there is still plenty of room for aggregate factors to be relevant.

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As part of our nation's central bank, the Richmond Fed is one of 12 regional Reserve Banks working together with the Board of Governors to support a healthy economy and deliver on our mission to foster economic stability and strength. We connect with community and business leaders across the Fifth Federal Reserve District - including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia - to monitor economic conditions, address issues facing our communities, and share this information with monetary and financial policymakers. We also work with banks to ensure they are operating safely and soundly, supply financial institutions with currency that's fit for distribution, and provide a safe and efficient way to transfer funds through our nation's payments system.