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Uncertainty Business Cycles - Really?

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  • Rüdiger Bachmann
  • Christian Bayer

Abstract

Are fluctuations in firms’ profitability risk a major cause of regular business cycles? We study this question within the framework of a heterogeneous-firm dynamic stochastic general equilibrium model with fixed capital adjustment costs. In such a model, surprise increases of risk lead to a wait-and-see policy for investment at the firm level and a decrease in aggregate economic activity. We calibrate the model using German firm-level data with a broader sectoral, size and ownership coverage than comparable U.S. data sets. The use of these data enables us to provide robust lower and upper bound estimates for the size of firm-level risk fluctuations. We find that time-varying firm-level risk on its own is unlikely to be a major quantitative source of regular business cycle fluctuations. When we augment a model with only aggregate productivity shocks by time-varying risk, the risk shocks dampen the high contemporaneous correlations of the productivity-shock-only model, but do not alter the other unconditional business cycle properties.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16862.

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Date of creation: Mar 2011
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Publication status: published as “Wait-and-See Business Cycles?”, joint with C. Bayer (University of Bonn), Journal of Monetary Economics (2013), Vol. 60(6), 704-719. Formerly circulating as “Uncertainty Business Cycles – Really?”, NBER WP 16862, and CESIFO-WP 2844 “Firm-Specific Productivity Risk over the Business Cycle: Facts and Aggregate Implications”.
Handle: RePEc:nbr:nberwo:16862

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  1. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Juan F. Rubio-Ramírez & Martin Uribe, 2009. "Risk Matters: The Real Effects of Volatility Shocks," PIER Working Paper Archive 09-013, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. 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.
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