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How do firms cope with economic shocks in real time?

Author

Listed:
  • Fetzer, Thiemo

    (University of Warwick and University of Bonn)

  • Palmou, Christina

    (Office for National Statistics (ONS))

  • Schneebacher, Jakob

    (Competition and Markets Authority (CMA), and affiliated with King’s College London (KCL) and the Economic Statistics Centre of Excellence (ESCoE))

Abstract

We study how businesses adjust to significant rises in energy costs. This matters for both the current energy crisis and the longer-term shift towards Net Zero. Using firm-level real-time survey and administrative data backed by a pre-registered analysis plan, we examine how firms respond to the energy price shock triggered by Russia’s invasion of Ukraine along output, price, input, process and survival margins. We find that, on average, firms pass on some cost increases, build up cash reserves, and face higher debt, but do not yet see layoffs or bankruptcies. However, effects are highly heterogeneous by size and industry: for instance, small firms tend to increase cash reserves and prices, while large firms invest more in capital. We estimate separate elasticities for many small industry cells and subsequently use k-means clustering techniques on the estimated effects to identify high-dimensional firm-adaptation archetypes. These estimates can help tailor firm support in the energy transition both in the short and the long term. More generally, the machinery developed in this paper enables policymakers to evaluate and adjust economic policy in near-real time.

Suggested Citation

  • Fetzer, Thiemo & Palmou, Christina & Schneebacher, Jakob, 2024. "How do firms cope with economic shocks in real time?," CAGE Online Working Paper Series 722, Competitive Advantage in the Global Economy (CAGE).
  • Handle: RePEc:cge:wacage:722
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/centres/cage/manage/publications/wp722.2024.pdf
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    More about this item

    Keywords

    energy price shock; firm dynamics; climate change; high-dimensional analysis JEL Classification: D22; D24; H23; L11; O30;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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