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Firm-Specific Productivity Risk over the Business Cycle: Facts and Aggregate Implications

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  • Ruediger Bachmann
  • Christian Bayer

Abstract

Is time-varying firm-level uncertainty a major cause or amplifier of the business cycle? This paper investigates this question in the context of a heterogeneous-firm RBC model with persistent firm-level productivity shocks and lumpy capital adjustment, where cyclical changes in uncertainty correspond naturally to cyclical changes in the cross-sectional dispersion of firm-specific Solow residual innovations. We use a German firm-level data set to investigate the extent to which firm-level uncertainty varies over the cycle. This allows us to put empirical discipline on our numerical simulations. We find that, while firm-level uncertainty is indeed countercyclical, it does not fluctuate enough to significantly alter the dynamics of an RBC model with only first moment shocks. The mild changes we do find are mainly caused by a bad news effect: higher uncertainty today predicts lower aggregate Solowresiduals tomorrow. This effect dominates the real option value effect of time-varying uncertainty, highlighted in the literature.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2844.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2844

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Keywords: Ss model; RBC model; lumpy investment; countercyclical risk; aggregate shocks; idiosyncratic shocks; heterogeneous firms; news shocks; uncertainty shocks;

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Citations

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Cited by:
  1. Edouard Schaal, 2011. "Uncertainty, Productivity and Unemployment in the Great Depression," 2011 Meeting Papers 1450, Society for Economic Dynamics.
  2. Simon Gilchrist & Jae W. Sim & Egon Zakrajšek, 2014. "Uncertainty, Financial Frictions, and Investment Dynamics," NBER Working Papers 20038, National Bureau of Economic Research, Inc.
  3. Ruediger Bachmann & Giuseppe Moscarini, 2011. "Business Cycles and Endogenous Uncertainty," 2011 Meeting Papers 36, Society for Economic Dynamics.
  4. Ruediger Bachmann & Steffen Elstner & Eric R. Sims, 2010. "Uncertainty and Economic Activity: Evidence from Business Survey Data," NBER Working Papers 16143, National Bureau of Economic Research, Inc.
  5. Ruediger Bachmann & Christian Bayer, 2009. "The Cross-section of Firms over the Business Cycle: New Facts and a DSGE Exploration," CESifo Working Paper Series 2810, CESifo Group Munich.
  6. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Keith Kuester & Juan Rubio-Ramirez, 2011. "Fiscal volatility shocks and economic activity," Working Papers 11-32, Federal Reserve Bank of Philadelphia.
  7. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," Working Papers 11-15, Center for Economic Studies, U.S. Census Bureau.
  8. Joseph Vavra, 2011. "Inflation Dynamics and Time-Varying Uncertainty: New Evidence and an Ss Interpretation," 2011 Meeting Papers 126, Society for Economic Dynamics.
  9. Alessio, Moro & Rodolfo, Stucchi, 2011. "Heterogeneous Productivity Shocks, Elasticity of Substitution and Aggregate Fluctuations," MPRA Paper 29032, University Library of Munich, Germany.

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