Year: 2011
Type: report
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.
DOI: 10.3386/w16862
Authors: Rüdiger Bachmann, Christian Bayer
Language: English
Domain: Social Sciences
Open Access status: green
Funder: Deutsche Bundesbank
OpenAlex ID: W1598902914