Firm dynamics and the origins of aggregate fluctuations

What drives aggregate fluctuations? I test the granular hypothesis - according to which the largest firms in the economy drive aggregate dynamics - by estimating a dynamic factor model with firm-level data. The growth rate of a firm׳s sales is decomposed in an unobserved common macroeconomic component and in a residual that I interpret as an idiosyncratic firm-level component. The empirical results show that, after properly controlling for aggregate shocks, idiosyncratic shocks have little role in explaining U.S. business cycle fluctuations.