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Investment Dispersion and the Business Cycle

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  • Rüdiger Bachmann
  • Christian Bayer

Abstract

We document a new business cycle fact: the cross-sectional standard deviation of firm-level investment (investment dispersion) is robustly and significantly procyclical. This makes investment dispersion different from the dispersion of productivity and output growth, which is countercyclical. Investment dispersion is more procyclical in the goods-producing sectors, for smaller firms and for structures. We show that a heterogeneous-firm real business cycle model with countercyclical idiosyncratic firm risk and non-convex adjustment costs calibrated to match moments of the long-run investment rate distribution, produces a time series correlation coefficient between investment dispersion and aggregate output of 0.58, close to the 0.45 in the data. We argue, more generally, that cross-sectional business cycle dynamics impose tight empirical restrictions on the physical environments and the structural parameters of heterogeneous-firm models.

Suggested Citation

  • Rüdiger Bachmann & Christian Bayer, 2011. "Investment Dispersion and the Business Cycle," NBER Working Papers 16861, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16861
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    More about this item

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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