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The Cross-section of Firms over the Business Cycle: New Facts and a DSGE Exploration

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  • Ruediger Bachmann
  • Christian Bayer

Abstract

Using a German firm-level data set, this paper is the first to jointly study the cyclical properties of the cross-sections of firm-level real value added and Solow residual innovations, as well as capital and employment adjustment. We find two new business cycle facts: 1) The cross-sectional standard deviation of firm-level innovations in the Solow residual, value added and employment is robustly and significantly countercyclical. 2) The cross-sectional standard deviation of firm-level investment is procyclical. We show that a heterogeneous-firm RBC model with quantitatively realistic countercyclically disperse innovations in the firm-level Solow residual and non-convex adjustment costs calibrated to the non-Gaussian features of the steady state investment rate distribution, produces investment dispersion that positively comoves with the cycle, with a correlation coefficient of 0.58, compared to 0.45 in the data. We argue more generally that the cross-sectional business cycle dynamics impose tight empirical restrictions on structural parameters and stochastic properties of driving forces in heterogeneous-firm models, and are therefore paramount in the calibration of these models.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2810.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2810

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Keywords: Ss model; RBC model; cross-sectional firm dynamics; lumpy investment; countercyclical risk; aggregate shocks; idiosyncratic shocks; heterogeneous firms;

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Cited by:
  1. Bachmann, Ruediger & Bayer, Christian, 2009. "Firm-specific productivity risk over the business cycle: facts and aggregate implications," Discussion Paper Series 1: Economic Studies 2009,15, Deutsche Bundesbank, Research Centre.
  2. Briana Chang, 2012. "Adverse Selection and Liquidity Distortion in Decentralized Markets," 2012 Meeting Papers, Society for Economic Dynamics 403, Society for Economic Dynamics.
  3. Yongsung Chang & Sunoong Hwang, 2011. "Asymmetric Phase Shifts in the U.S. Industrial Production Cycles," RCER Working Papers 564, University of Rochester - Center for Economic Research (RCER).
  4. Tom Holden, 2012. "Medium-frequency cycles and the remarkable near trend-stationarity of output," School of Economics Discussion Papers, School of Economics, University of Surrey 1412, School of Economics, University of Surrey.
  5. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," Working Papers 11-15, Center for Economic Studies, U.S. Census Bureau.
  6. Briana Chang, 2011. "Adverse Selection and Liquidity Distortion in Decentralized Markets," 2011 Meeting Papers 157, Society for Economic Dynamics.

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