The Great Moderation hides a lot of volatility

It has become difficult to make much sense of the business cycle lately.
The first puzzle was the so-called Great Moderation, as somehow business cycle fluctuations across the world became more dampened over the last two decades or so. The second one is what we are currently witnessing. Add to this a curious phenomenon that Natasha Xingyuan Che is documenting: while aggregate volatility was reduced during the Great Moderation, idiosyntract volatility (at the firm level) was actually higher. This is an indication that aggregate volatility changes were not just the consequence of a general change in volatility, but rather that the way the economy is organized has changed.

Che verifies this conjecture both empirically and using a model where organizational capital is crucial. Indeed, this intangible capital creates considerable idiosyncratic risk, but it also considerable reduces the comovement between firms. By definition, organizational capital is firm specific, basically whatever would give a firm value above the tangibles. Count in a customer base, work morale, reputation, "how to do things", etc. So, this capital seems quite independent of other firms, one can even argue that it creates a negative comovement with other firms: if, say, a firm gets a negative reputation shock, it lowers its sales and the competitors pick up a larger share of total demand.