The Devil Is in the Tail: Macroeconomic Tail Risk Expectations of Firms

Manuel Menkhoff

No 11848, CESifo Working Paper Series from CESifo

Abstract: This paper examines novel survey evidence on firms’ beliefs about macroeconomic tail risk and their role in investment decisions. In a large survey of German firms, I elicit (i) the subjective probability of a severe macroeconomic downturn and (ii) firms’ exposure to such an event. I consistently find across different empirical approaches that a higher probability of a severe macroeconomic downturn substantially lowers investment, particularly for firms that report higher exposure to the event. I attribute less than half of the investment response to changes in firms' subjective first and second moments. In a quantitative heterogeneous firm model calibrated to match the survey evidence, firms' concern with tail risk makes fiscal policy particularly effective for stabilizing investment.

Keywords: macroeconomic tail risk; rare events; firm expectations; investment. (search for similar items in EconPapers)
JEL-codes: D84 E22 E32 G30 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_11848

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