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Investment Dispersion and the Business Cycle

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  • R?diger Bachmann
  • Christian Bayer

Abstract

The cross-sectional dispersion of firm-level investment rates is procyclical. This makes investment rates different from productivity, output, and employment growth, which have countercyclical dispersions. A calibrated heterogeneous-firm business cycle model with nonconvex capital adjustment costs and countercyclical dispersion of firm-level productivity shocks replicates these facts and produces a correlation between investment dispersion and aggregate output of 0.53, close to 0.45 in the data. We find that small shocks to the dispersion of productivity, which in the model constitutes firm risk, suffice to generate the mildly procyclical investment dispersion in the data but do not produce serious business cycles.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 104 (2014)
Issue (Month): 4 (April)
Pages: 1392-1416

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Handle: RePEc:aea:aecrev:v:104:y:2014:i:4:p:1392-1416

Note: DOI: 10.1257/aer.104.4.1392
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  1. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 317-341.
  2. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers 1997-37, Carnegie Mellon University, Tepper School of Business.
  3. Ulf von Kalckreuth, 2003. "Exploring the role of uncertainty for corporate investment decisions in Germany," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(II), pages 173-206, June.
  4. Den Haan, Wouter, 2008. "Assessing the Accuracy of the Aggregate Law of Motion in Models with Heterogeneous Agents," CEPR Discussion Papers 6971, C.E.P.R. Discussion Papers.
  5. Amit Gandhi & Salvador Navarro & David Rivers, 2011. "On the Identification of Production Functions: How Heterogeneous is Productivity?," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20119, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
  6. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  7. Bayer, Christian, 2006. "Investment dynamics with fixed capital adjustment cost and capital market imperfections," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1909-1947, November.
  8. Ackerberg, Daniel & Caves, Kevin & Frazer, Garth, 2006. "Structural identification of production functions," MPRA Paper 38349, University Library of Munich, Germany.
  9. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Wiley Blackwell, vol. 70(2), pages 317-341, 04.
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Cited by:
  1. Joseph Vavra, 2013. "Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 129(1), pages 215-258.
  2. D'Elia, Enrico & Nascia, Leopoldo & Zeli, Alessandro, 2011. "Analisi dei modelli d’impresa: discontinuità e sviluppo
    [Analysing firm's evolution: discontinuity and growth]
    ," MPRA Paper 35926, University Library of Munich, Germany.
  3. Matthias Kehrig & Nicolas Vincent, 2013. "Financial Frictions and Investment Dynamics in Multi-Plant Firms," Working Papers 13-56, Center for Economic Studies, U.S. Census Bureau.
  4. Verona, Fabio, 2013. "Investment dynamics with information costs," Research Discussion Papers 18/2013, Bank of Finland.
  5. Roberta Distante & Ivan Petrella & Emiliano Santoro, 2013. "Asymmetry Reversals and the Business Cycle," Working Papers 2013.54, Fondazione Eni Enrico Mattei.
  6. Joseph Vavra, 2011. "Inflation Dynamics and Time-Varying Uncertainty: New Evidence and an Ss Interpretation," 2011 Meeting Papers 126, Society for Economic Dynamics.
  7. Laura Veldkamp & Anna Orlik, 2013. "Understanding Uncertainty Shocks," 2013 Meeting Papers 391, Society for Economic Dynamics.
  8. Rui Castro & Gian Luca Clementi & Yoonsoo Lee, 2011. "Cross-Sectoral Variation in The Volatility of Plant-Level Idiosyncratic Shocks," NBER Working Papers 17659, National Bureau of Economic Research, Inc.
  9. D'Elia, Enrico, 2011. "A simple model of discontinuous firm’s growth," MPRA Paper 35925, University Library of Munich, Germany.

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