Working Papers

2021-22 | February 2023


Turbulent Business Cycles

Author(s): Ding Dong, Zheng Liu, and Pengfei Wang

Recessions are associated with sharp increases in turbulence that reshuffle firms' productivity rankings. To study the business cycle implications of turbulence shocks, we use Compustat data to construct a measure of turbulence based on the (inverse of) Spearman correlations of firms' productivity rankings between adjacent years. We document evidence that turbulence rises in recessions, reallocating labor and capital from high- to low-productivity firms and reducing aggregate TFP and the stock market value of firms. A real business cycle model with heterogeneous firms and financial frictions can generate the observed macroeconomic and reallocation effects of turbulence. In the model, increased turbulence makes high-productivity firms less likely to remain productive, reducing their expected equity values and tightening their borrowing constraints relative to low-productivity firms. This leads to a reallocation that reduces aggregate TFP. Unlike uncertainty, turbulence changes both the conditional mean and the conditional variance of the firm productivity distribution, enabling a turbulence shock to generate a recession with synchronized declines in aggregate activities.

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Article Citation

Dong, Ding, Zheng Liu, and Pengfei Wang. 2023. "Turbulent Business Cycles," Federal Reserve Bank of San Francisco Working Paper 2021-22. Available at