How do firms respond to demand and supply shocks?

Michał Gradzewicz

No 2022-075, KAE Working Papers from Warsaw School of Economics, Collegium of Economic Analysis

Abstract: The study aims to identify the granular demand and productivity shocks, their properties, and the responses of the important firm-level variables to these shocks. We use comprehensive data from the Polish enterprise sector that cover the 2002-2019 period. As the data do not include prices, the identification of the demand shocks relies on the information on inventory changes. We utilize the control function approach to estimate the parameters of the production function and to identify productivity shocks. We use projection methods with granular data to identify the dynamic impulse-response function. We show that the distributions of the two shocks differ: i.e., supply (productivity) shocks are symmetrically distributed, and the distribution of demand shocks is negatively skewed. Moreover, both distributions have fat tails. Productivity shocks have much more persistent effect on firms' outcomes than demand shocks. Following demand shocks, there are short-lived increases in output, market share, productivity, real wages and markups; whereas investment and employment demand remain elevated for a longer period. We also find a very limited transmission of productivity into wages and we showed that proxies for prices increase after demand shocks, and they decrease after the supply shock, in a theory-consistent way.

Keywords: demand shocks; supply shocks; granular impulse response function; granular local projections (search for similar items in EconPapers)
JEL-codes: D22 D24 D4 J42 L11 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2022-04
New Economics Papers: this item is included in nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: How do firms respond to demand and supply shocks? (2022)
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