Year: 2011
Type: report
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.
DOI: 10.3386/w16861
Authors: Rüdiger Bachmann, Christian Bayer
Institutions: University of Michigan, RWTH Aachen University, University of Bonn
Language: English
Domain: Social Sciences
Open Access status: green
Funder: Deutsche Bundesbank
OpenAlex ID: W3122230548