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‘Wait-and-See’ business cycles?

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  • Bachmann, Rüdiger
  • Bayer, Christian

Abstract

Are shocks to firms' profitability risk, propagated by physical capital adjustment costs, a major source of business cycle fluctuations? This paper studies this question using a heterogeneous-firm dynamic stochastic general equilibrium model, where firms face fixed capital adjustment costs. Surprise increases in idiosyncratic risk lead firms to adopt a ‘wait-and-see’ policy for investment. The model is calibrated using a German firm-level data set with broader coverage than comparable U.S. data sets. The main result is that time-varying firm-level risk through ‘wait-and-see’ dynamics is unlikely a major source of business cycle fluctuations.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 60 (2013)
Issue (Month): 6 ()
Pages: 704-719

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Handle: RePEc:eee:moneco:v:60:y:2013:i:6:p:704-719

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Web page: http://www.elsevier.com/locate/inca/505566

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Citations

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Cited by:
  1. Benjamin Born & Johannes Pfeifer, 2011. "Policy Risk and the Business Cycle," Bonn Econ Discussion Papers bgse06_2011, University of Bonn, Germany.
  2. Nancy L. Stokey, 2013. "Wait-and-See: Investment Options under Policy Uncertainty," NBER Working Papers 19630, National Bureau of Economic Research, Inc.
  3. Nicholas Bloom, 2014. "Fluctuations in Uncertainty," Journal of Economic Perspectives, American Economic Association, vol. 28(2), pages 153-76, Spring.
  4. Ruediger Bachmann & Benjamin Born & Steffen Elstner & Christian Grimme, 2013. "Time-Varying Business Volatility, Price Setting, and the Real Effects of Monetary Policy," NBER Working Papers 19180, National Bureau of Economic Research, Inc.
  5. Hashem Pesaran & Ambrogio Cesa-Bianchi & Alessandro Rebucci, 2014. "Uncertainty and Economic Activity: A Global Perspective," Cambridge Working Papers in Economics 1407, Faculty of Economics, University of Cambridge.

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