Firm-Specific Productivity Risk Over the Business Cycle: Facts and Aggregate Implications

75 Pages Posted: 12 Nov 2009

Date Written: November 2009


Is time-varying firm-level uncertainty a major cause or amplifier of the business cycle? This paper investigates this question in the context of a heterogeneous-firm RBC model with persistent firm-level productivity shocks and lumpy capital adjustment, where cyclical changes in uncertainty correspond naturally to cyclical changes in the cross-sectional dispersion of firm-specific Solow residual innovations. We use a German firm-level data set to investigate the extent to which firm-level uncertainty varies over the cycle. This allows us to put empirical discipline on our numerical simulations. We find that, while firm-level uncertainty is indeed countercyclical, it does not fluctuate enough to significantly alter the dynamics of an RBC model with only first moment shocks. The mild changes we do find are mainly caused by a bad news effect: higher uncertainty today predicts lower aggregate Solowresiduals tomorrow. This effect dominates the real option value effect of time-varying uncertainty, highlighted in the literature.

Keywords: Ss model, RBC model, lumpy investment, countercyclical risk, aggregate shocks, idiosyncratic shocks, heterogeneous firms, news shocks, uncertainty shocks

JEL Classification: E20, E22, E30, E32

Suggested Citation

Bachmann, Ruediger and Bayer, Christian, Firm-Specific Productivity Risk Over the Business Cycle: Facts and Aggregate Implications (November 2009). CESifo Working Paper Series No. 2844, Available at SSRN: or

Ruediger Bachmann (Contact Author)

Yale University ( email )

New Haven, CT 06520
United States

Christian Bayer

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics