Reputation and Aggregate Shocks

Investment in reputation responds positively to news shocks and to current aggregate shocks when they are autocorrelated. Idiosyncratic risk is contractionary and reduces the response to aggregate shocks. In this sense the rise in idiosyncratic risk can explain the great moderation -- the two have happened roughly at the same time. The greater cyclicality of durables can also be explained with this mechanism because durables have greater technological products and firms making them have more prove by exerting effort.