The Cross-Section of Firms Over the Business Cycle: New Facts and a DSGE Exploration

60 Pages Posted: 8 Dec 2009  

Rudi Bachmann

University of Michigan at Ann Arbor - Department of Economics

Christian Bayer

Bocconi University

Date Written: October 2009

Abstract

Using a German firm-level data set, this paper is the first to jointly study the cyclical properties of the cross-sections of firm-level real value added and Solow residual innovations, as well as capital and employment adjustment. We find two new business cycle facts: 1) The cross-sectional standard deviation of firm-level innovations in the Solow residual, value added and employment is robustly and significantly countercyclical. 2) The cross-sectional standard deviation of firm-level investment is procyclical. We show that a heterogeneous-firm RBC model with quantitatively realistic countercyclically disperse innovations in the firm-level Solow residual and non-convex adjustment costs calibrated to the non-Gaussian features of the steady state investment rate distribution, produces investment dispersion that positively comoves with the cycle, with a correlation coefficient of 0.58, compared to 0.45 in the data. We argue more generally that the cross-sectional business cycle dynamics impose tight empirical restrictions on structural parameters and stochastic properties of driving forces in heterogeneous-firm models, and are therefore paramount in the calibration of these models.

Keywords: Ss model, RBC model, cross-sectional firm dynamics, lumpy investment, countercyclical risk, aggregate shocks, idiosyncratic shocks, heterogeneous firms

JEL Classification: E20, E22, E30, E32

Suggested Citation

Bachmann, Rudi and Bayer, Christian, The Cross-Section of Firms Over the Business Cycle: New Facts and a DSGE Exploration (October 2009). CESifo Working Paper Series No. 2810. Available at SSRN: https://ssrn.com/abstract=1487989

Rudi Bachmann (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

Christian Bayer

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

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