The cross-section offirms over the business cycle:new facts and a DSGE exploration

Using a unique German firm-level data set, this paper is the first to jointlystudy the cyclical properties of the cross-sections of firm-level real value addedand Solow residual innovations, as well as capital and employment adjustment.We find two new business cycle facts: 1) The cross-sectional standard deviationof firm-level innovations in the Solow residual, value added and employment isrobustly and significantly countercyclical. 2) The cross-sectional standard deviationof firm-level investment is procyclical. We show that a heterogeneousfirmRBC model with quantitatively realistic countercyclical innovations in thefirm-level Solow residual and non-convex adjustment costs calibrated to the non-Gaussian features of the steady state investment rate distribution, produces investmentdispersion that positively comoves with the cycle, with a correlationcoefficient of 0.65, compared to 0.61 in the data. We argue more generally thatthe cross-sectional business cycle dynamics impose tight empirical restrictions onstructural parameters and stochastic properties of driving forces in heterogeneousfirmmodels,and are therefore paramount in the calibration of these models.[...] Ruediger Bachmann, Christian Bayer