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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.

Suggested Citation

  • Rüdiger Bachmann & Christian Bayer, 2011. "Uncertainty Business Cycles - Really?," NBER Working Papers 16862, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16862
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    References listed on IDEAS

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    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474, December.
    2. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Juan F. Rubio-Ramirez & Martin Uribe, 2011. "Risk Matters: The Real Effects of Volatility Shocks," American Economic Review, American Economic Association, vol. 101(6), pages 2530-2561, October.
    3. 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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    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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