Working Paper: NBER ID: w16861
Authors: 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.
Keywords: investment dispersion; business cycle; heterogeneous firms; real business cycle; countercyclical risk
JEL Codes: E2; E22; E3; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| investment dispersion (D39) | aggregate output (E10) |
| aggregate output (E10) | investment dispersion (D39) |
| investment dispersion (D39) | productivity growth (O49) |
| joint dynamics of investment, output growth, and productivity growth (O49) | parameter restrictions for heterogeneous firm models (F12) |
| nature of capital adjustment costs (D24) | cyclical behavior of investment dispersion (E32) |
| curvature of firms' revenue function (D21) | cyclical behavior of investment dispersion (E32) |