Uncertainty Business Cycles - Really? / Rüdiger Bachmann, Christian Bayer.

Format:

Book

Author/Creator:

Bachmann, Rüdiger.

Contributor:

National Bureau of Economic Research.

Bayer, Christian.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16862.

NBER working paper series no. w16862

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

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.

Notes:

Print version record

March 2011.