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Firm Risk and Leverage Based Business Cycles

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  • Sanjay K. Chugh

    (Boston College)

Abstract

I characterize cyclical fluctuations in the cross-sectional dispersion of firm-level productivity in the U.S. manufacturing sector. Using the estimated dispersion, or "risk," stochastic process as an input to a baseline DSGE financial accelerator model, I assess how well the model reproduces aggregate cyclical movements in the financial conditions of U.S. non-financial firms. In the model, risk shocks calibrated to micro data induce large and empirically-relevant fluctuations in leverage, a nancial measure typically thought to be closely associated with real activity. In terms of aggregate quantities, however, pure risk shocks account for only a small share of GDP fluctuations in the model, less than one percent. Instead, it is standard aggregate productivity shocks that explain virtually all of the model's real fluctuations. These results reveal a dichotomy at the core of a popular class of DSGE financial frictions models: risk shocks induce large financial fiuctuations, but have little effect on aggregate quantity fluctuations.

Suggested Citation

  • Sanjay K. Chugh, 2013. "Firm Risk and Leverage Based Business Cycles," Boston College Working Papers in Economics 844, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:844
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    References listed on IDEAS

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    Cited by:

    1. Susanto Basu & Brent Bundick, 2017. "Uncertainty Shocks in a Model of Effective Demand," Econometrica, Econometric Society, vol. 85, pages 937-958, May.
    2. repec:eee:dyncon:v:78:y:2017:i:c:p:1-25 is not listed on IDEAS
    3. Verona, Fabio & Martins, Manuel M.F. & Drumond, Inês, 2017. "Financial shocks, financial stability, and optimal Taylor rules," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 187-207.
    4. Grimme, Christian, 2017. "Uncertainty and the Cost of Bank vs. Bond Finance," MPRA Paper 79852, University Library of Munich, Germany.
    5. Richter, Alexander W. & Throckmorton, Nathaniel A., 2015. "The consequences of an unknown debt target," European Economic Review, Elsevier, vol. 78(C), pages 76-96.
    6. Born, Benjamin & Pfeifer, Johannes, 2014. "Policy risk and the business cycle," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 68-85.
    7. repec:eee:inecon:v:111:y:2018:i:c:p:143-158 is not listed on IDEAS
    8. Tian, Can, 2015. "Riskiness, endogenous productivity dispersion and business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 227-249.
    9. Chugh, Sanjay K., 2013. "Costly external finance and labor market dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2882-2912.

    More about this item

    Keywords

    leverage; second-moment shocks; time-varying volatility; credit frictions; financial accelerator; business cycles;

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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