Investment Dispersion and the Business Cycle

Ruediger Bachmann and Christian Bayer

No 16861, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document a new business cycle fact: the cross-sectional standard deviation of firm-level investment (investment dispersion) is robustly and significantly procyclical. This makes investment dispersion different from the dispersion of productivity and output growth, which is countercyclical. Investment dispersion is more procyclical in the goods-producing sectors, for smaller firms and for structures. We show that a heterogeneous-firm real business cycle model with countercyclical idiosyncratic firm risk and non-convex adjustment costs calibrated to match moments of the long-run investment rate distribution, produces a time series correlation coefficient between investment dispersion and aggregate output of 0.58, close to the 0.45 in the data. We argue, more generally, that cross-sectional business cycle dynamics impose tight empirical restrictions on the physical environments and the structural parameters of heterogeneous-firm models.

JEL-codes: E2 E22 E3 E32 (search for similar items in EconPapers)
Date: 2011-03
Note: EFG
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Citations: View citations in EconPapers (7)

Published as R?diger Bachmann & Christian Bayer, 2014. "Investment Dispersion and the Business Cycle," American Economic Review, American Economic Association, vol. 104(4), pages 1392-1416, April.

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Journal Article: Investment Dispersion and the Business Cycle (2014)
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