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‘Wait-and-See’ business cycles?

  • Bachmann, Rüdiger
  • Bayer, Christian

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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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
DOI: 10.1016/j.jmoneco.2013.05.005
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