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Christian Bayer, Bocconi Print
Tuesday, 22 September 2009, 14:00 - 15:30

The Cross-section of Firms over the Business Cycle: New Facts and a DSGE Exploration

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.

Christian Bayer, Bocconi University

Location: S 12.227
Contact: Claude Adan, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it