Granular cities

This study extends the concept of granularity from firms to cities, examining how large cities influence national economic dynamics beyond their relative size. By applying Zipf's law, which describes the power law distribution of city sizes, we investigate the interplay between granularity and business cycles. Our aim is to test the granular hypothesis that large cities have a significant impact on the business cycle beyond their relative size. We analyze data from American and Brazilian cities between 2003 and 2019 assessing the granular residuals and their explanatory power. Our findings reveal that in the United States, the granular city size is three metropolitan areas or five counties when redefined. In Brazil, it equates to three municipalities. These results emphasize the substantial role large cities play in national economic fluctuations, suggesting that policy interventions that target infrastructure, education, and innovation in major urban centers could have widespread economic benefits. This paper's contribution to the literature is to highlight a spatial component of granularity not considered so far.