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The cross-section of firms over the business cycle: new facts and a DSGE exploration

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  • Bachmann, Ruediger
  • Bayer, Christian

Abstract

Using a unique German firm-level data set, this paper is the first to jointly study the cyclical properties of the cross-sections of firm-level real value added and Solow residual innovations, as well as capital and employment adjustment. We find two new business cycle facts: 1) The cross-sectional standard deviation of firm-level innovations in the Solow residual, value added and employment is robustly and significantly countercyclical. 2) The cross-sectional standard deviation of firm-level investment is procyclical. We show that a heterogeneousfirm RBC model with quantitatively realistic countercyclical innovations in the firm-level Solow residual and non-convex adjustment costs calibrated to the non-Gaussian features of the steady state investment rate distribution, produces investment dispersion that positively comoves with the cycle, with a correlation coefficient of 0.65, compared to 0.61 in the data. We argue more generally that the cross-sectional business cycle dynamics impose tight empirical restrictions on structural parameters and stochastic properties of driving forces in heterogeneousfirmmodels, and are therefore paramount in the calibration of these models.

Suggested Citation

  • Bachmann, Ruediger & Bayer, Christian, 2009. "The cross-section of firms over the business cycle: new facts and a DSGE exploration," Discussion Paper Series 1: Economic Studies 2009,17, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp1:200917
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    Cited by:

    1. Ruediger Bachmann & Christian Bayer, 2009. "Firm-Specific Productivity Risk over the Business Cycle: Facts and Aggregate Implications," 2009 Meeting Papers 869, Society for Economic Dynamics.
    2. Briana Chang, 2012. "Adverse Selection and Liquidity Distortion in Decentralized Markets," 2012 Meeting Papers 403, Society for Economic Dynamics.
    3. Briana Chang, 2011. "Adverse Selection and Liquidity Distortion in Decentralized Markets," 2011 Meeting Papers 157, Society for Economic Dynamics.
    4. Yongsung Chang & Sunoong Hwang, 2011. "Asymmetric Phase Shifts in the U.S. Industrial Production Cycles," RCER Working Papers 564, University of Rochester - Center for Economic Research (RCER).
    5. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," 2011 Meeting Papers 484, Society for Economic Dynamics.
    6. Tom Holden, 2012. "Medium-frequency cycles and the remarkable near trend-stationarity of output," School of Economics Discussion Papers 1412, School of Economics, University of Surrey.
    7. Sebastian Dyrda, 2015. "Fluctuations in uncertainty, efficient borrowing constraints and firm dynamics," 2015 Meeting Papers 1243, Society for Economic Dynamics.

    More about this item

    Keywords

    Ss model; RBC model; cross-sectional firm dynamics; lumpy investment; countercyclical risk; aggregate shocks; idiosyncratic shocks; heterogeneous firms.;

    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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