Investment Dispersion and the Business Cycle

The cross-sectional dispersion of firm-level investment rates is procyclical. This makes investment rates different from productivity, output, and employment growth, which have countercyclical dispersions. A calibrated heterogeneous-firm business cycle model with nonconvex capital adjustment costs a...

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Bibliographic Details
Published in:The American economic review 2014-04, Vol.104 (4), p.1392-1416
Main Authors: Bachmann, Rüdiger, Bayer, Christian
Format: Article
Language:English
Subjects:
Aggregates
Business cycles
Business forecasts
Business structures
Capital costs
Capital investments
Correlation
Costs
Countercyclicality
Economic fluctuations
Economic theory
Employment
Financial investments
Income distribution
Investment
Investment policy
Investment rates
Investment risk
Investments
Macroeconomics
Manufacturing
Procyclicality
Productivity
Risk
Shorter Papers
Studies
U.S.A
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Summary:The cross-sectional dispersion of firm-level investment rates is procyclical. This makes investment rates different from productivity, output, and employment growth, which have countercyclical dispersions. A calibrated heterogeneous-firm business cycle model with nonconvex capital adjustment costs and countercyclical dispersion of firm-level productivity shocks replicates these facts and produces a correlation between investment dispersion and aggregate output of 0.53, close to 0.45 in the data. We find that small shocks to the dispersion of productivity, which in the model constitutes firm risk, suffice to generate the mildly procyclical investment dispersion in the data but do not produce serious business cycles.
ISSN:0002-8282
1944-7981
DOI:10.1257/aer.104.4.1392