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Dispersion Over the Business Cycle: Productivity versus Demand

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  • Alex Clymo

    (University of Essex)

Abstract

In this paper we use rich Swedish micro-data to show that increased dispersion during recessions is primarily a demand-side phenomenon. The key novelty of our analysis is that we use goods-level data on prices to estimate firm-level demand shocks, and production-line-level data on reported capacity utilization to accurately measure firm-level supply (TFPQ) shocks. We document that the dispersion of both TFPQ and demand growth across firms rose during the Great Recession, but that the increased dispersion in TFPQ growth is reduced by up to 1/4 after controlling for capacity utilization. We then perform a semi-structural variance decomposition exercise for firm-level sales growth. We show that 2/3 of the increased dispersion in sales growth in 2009 is explained by the increased dispersion of demand, while TFPQ dispersion plays essentially no role. Key to this finding is that we estimate a low level of passthrough from TFPQ shocks to prices, limiting the ability of increased TFPQ shock dispersion to affect sales dispersion. Consistent with this, we find evidence that demand curves are kinked.

Suggested Citation

  • Alex Clymo, 2019. "Dispersion Over the Business Cycle: Productivity versus Demand," 2019 Meeting Papers 1125, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1125
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    References listed on IDEAS

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