Great moderation at the firm level?Unconditional versus conditional output volatility

Aggregated output in industrialized countries has become less volatile over the pastdecades. Whether this “Great Moderation” can be found in firm level data as wellremains disputed. We study the evolution of firm level output volatility using abalanced panel dataset on German firms that covers 35 years (1971-2005) and about1,500 firms per year. In contrast to earlier work using firm level data, we use themultifactor residual model proposed by Pesaran (2006) to isolate the idiosyncraticcomponent of firms’ real sales growth from macroeconomic developments. Our paperhas three main findings. First, time trends in unconditional firm level and aggregatedoutput volatility in Germany are similar. There has been a long-run downward trend,which was interrupted by the unification period. Second, the conditional, idiosyncraticfirm level volatility does not exhibit a downward trend. If anything idiosyncraticvolatility has been on a slow trend rise. Third, we find evidence of a positive linkbetween growth and volatility at the firm level.[...]