Macroeconomic Fluctuations and Firm Dynamics: Technology, Production and Capital Formation

Abstract: This thesis consists of four self-contained essays.Essay 1 examines different production function methods for measuring technology and the relationship between technology and cyclical variables. Technology growth is estimated using several variants of the Solow (1957) - Hall (1988, 1990) method on data for Swedish two-digit manufacturing industries. I apply and evaluate two different approaches to control for varying factor utilization, developed by Basu and Kimball (1997) and Burnside et al. (1995), respectively. I also propose a generalization of the latter specification. The cyclical behavior of the preferred technology measure is studied and the responses of hours and output to a technology shock are estimated using a variant of the standard VAR-approach. The main finding is that a positive technology shock has, on impact, a contractionary effect on hours and a non-expansionary effect on output, which is inconsistent with the predictions of the canonical real business cycle model.Essay 2 (with Annika Alexius) studies different measures of technology in order to find out (i) to what extent they capture the same underlying phenomenon and (ii) whether they display similar cyclical patterns. We use two versions of the production function approach and the structural VAR methodology to estimate technology shocks for the U.S. non-farm private economy. Our main finding is that structural VAR models produce measures of technology shocks that are highly correlated with production function measures. However, the exact specification of the long-run restrictions used to identify technology shocks in the structural VARs seems to be of importance for the results. While we replicate the standard finding of a strongly procyclical Solow residual, all other measures of technology are either acyclical or countercyclical.Essay 3 (with Stefan Laséen) examines the capital adjustment process in Swedish manufacturing firms and relates the empirical findings to standard models of firm behavior in the presence of impediments to capital adjustments. We find that (i) an S,s model fits the data well in some, but not all, dimensions. (ii) A model with irreversible capital goes a long way in capturing the salient features of firm-level capital adjustment behavior. (iii) The partial adjustment model generally fails to explain capital adjustment patterns. (iv) The capital accumulation process is a highly volatile and non-persistent process on the firm-level. (v) Firms’ adjustment behavior is asymmetric in that they are more likely to tolerate excess capital than shortages of capital, and, finally, (vi) the estimated adjustment function implies that aggregate investment is relatively unresponsive to aggregate shocks in deep recessions as compared to normal times. Essay 4 provides empirical evidence on the dynamic effects of uncertainty on firm-level capital accumulation. A novelty in this paper is that the firm-level uncertainty indicator is motivated and derived from a neoclassical investment model. The model is used as a base for the empirical work where an error-correction approach is employed to separate the short-run dynamic effects from the effects on the long-run capital stock. I find a negative effect of uncertainty on capital accumulation, both in the short- and the long-run. The short-run effect is non-negligible, whereas the long-run effect is more moderate.