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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.

Suggested Citation

  • Ruediger Bachmann & Christian Bayer, 2009. "Firm-Specific Productivity Risk over the Business Cycle: Facts and Aggregate Implications," CESifo Working Paper Series 2844, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_2844
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jesús Fernández-Villaverde & Pablo Guerrón-Quintana & Keith Kuester & Juan Rubio-Ramírez, 2015. "Fiscal Volatility Shocks and Economic Activity," American Economic Review, American Economic Association, vol. 105(11), pages 3352-3384, November.
    2. Robert Ulbricht & Ludwig Straub, 2015. "Endogenous Uncertainty and Credit Crunches," 2015 Meeting Papers 199, Society for Economic Dynamics.
    3. Eric T. Swanson, 2012. "Risk Aversion and the Labor Margin in Dynamic Equilibrium Models," American Economic Review, American Economic Association, vol. 102(4), pages 1663-1691, June.
    4. Moro, Alessio & Stucchi, Rodolfo, 2015. "Heterogeneous productivity shocks, elasticity of substitution and aggregate fluctuations," Journal of Macroeconomics, Elsevier, pages 45-53.
    5. R?diger Bachmann & Steffen Elstner & Eric R. Sims, 2013. "Uncertainty and Economic Activity: Evidence from Business Survey Data," American Economic Journal: Macroeconomics, American Economic Association, pages 217-249.
    6. Jae Sim & Egon Zakrajsek & Simon Gilchrist, 2010. "Uncertainty, Financial Frictions, and Investment Dynamics," 2010 Meeting Papers 1285, Society for Economic Dynamics.
    7. Straub, Ludwig & Ulbricht, Robert, 2016. "Endogenous Second Moments: A Unified Approach to Fluctuations in Risk, Dispersion, and Uncertainty," TSE Working Papers 16-664, Toulouse School of Economics (TSE).
    8. Joseph Vavra, 2014. "Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 129(1), pages 215-258.
    9. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," Working Papers 11-15, Center for Economic Studies, U.S. Census Bureau.
    10. Kaiji Chen & Tao Zha, 2015. "Lending Efficiency Shocks," Emory Economics 1505, Department of Economics, Emory University (Atlanta).
    11. Pablo D. Fajgelbaum & Edouard Schaal & Mathieu Taschereau-Dumouchel, 2017. "Uncertainty Traps," The Quarterly Journal of Economics, Oxford University Press, vol. 132(4), pages 1641-1692.
    12. Christian Bayer & Ruediger Bachmann, 2009. "The Cross-section of Firms over the Business Cycle: New Facts and a DSGE Exploration," 2009 Meeting Papers 866, Society for Economic Dynamics.

    More about this item

    Keywords

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

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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