According to Domino Sugar, it is not recommended to substitute powdered sugar for granulated sugar when baking. Powdered sugar is much finer and can create an undesirable texture in the final product.
Powdered sugar, also known as confectioner's sugar, contains around 3 percent cornstarch to prevent it from clumping when exposed to moisture. This cornstarch can cause unexpected results in baking recipes. The larger crystals of granulated sugar are much less prone to dissolving in liquids than powdered sugar, and they also serve to add structure to baked goods. Likewise, it is not recommended to substitute granulated sugar for powdered sugar in recipes that require a smooth texture, such as frosting or glazes, because the crystals are too large to dissolve thoroughly without heat.