Turbulent Business Cycles

Ding Dong (), Zheng Liu and Pengfei Wang

No 2021-22, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Firm-level evidence suggests that turbulence that reshuffles firms’ productivity rankings rises sharply in recessions. An increase in turbulence reallocates labor and capital from high- to low-productivity firms, reducing aggregate TFP and the stock market value of firms. A real business cycle model with heterogeneous firms and financial frictions can generate the observed macroeconomic and reallocation effects of turbulence. In the model, increased turbulence makes high-productivity firms less likely to remain productive, reducing their expected equity values and tightening their borrowing constraints relative to low-productivity firms. This leads to a reallocation that reduces aggregate TFP. Unlike uncertainty, turbulence changes both the conditional mean and the conditional variance of the firm productivity distribution, enabling a turbulence shock to generate a recession with synchronized declines in aggregate activities.

JEL-codes: D24 D25 E32 (search for similar items in EconPapers)
Pages: 71
Date: 2025-02-26
New Economics Papers: this item is included in nep-bec, nep-cwa, nep-dge, nep-fdg, nep-isf and nep-mac
Note: Original publication date: 9/7/2021.
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DOI: 10.24148/wp2021-22

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