Working Paper: NBER ID: w16862
Authors: 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.
Keywords: business cycles; firm-level risk; dynamic stochastic general equilibrium
JEL Codes: E20; E22; E30; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| surprise increases in firm-level risk (D80) | wait-and-see investment policy (G11) |
| wait-and-see investment policy (G11) | decrease in aggregate economic activity (E20) |
| surprise increases in firm-level risk (D80) | decrease in aggregate economic activity (E20) |
| risk shocks (D81) | volatility of output (E23) |
| risk shocks (D81) | volatility of consumption (D11) |
| risk shocks (D81) | volatility of investment (G11) |
| risk shocks (D81) | volatility of employment (J63) |
| risk shocks (D81) | dampen correlations of productivity shocks (O49) |