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Correlated Disturbances and U.S. Business Cycles

Vasco Cúrdia; Ricardo Reis

Title:
Correlated Disturbances and U.S. Business Cycles
Author(s):
Cúrdia, Vasco
Reis, Ricardo
Date:
Type:
Working papers
Department:
Economics
Permanent URL:
Series:
Department of Economics Discussion Papers
Part Number:
0910-12
Publisher:
Department of Economics, Columbia University
Publisher Location:
New York
Abstract:
The dynamic stochastic general equilibrium (DSGE) models that are used to study business cycles typically assume that exogenous disturbances are independent autoregressions of order one. This paper relaxes this tight and arbitrary restriction, by allowing for disturbances that have a rich contemporaneous and dynamic correlation structure. Our first contribution is a new Bayesian econometric method that uses conjugate conditionals to make the estimation of DSGE models with correlated disturbances feasible and quick. Our second contribution is a re-examination of U.S. business cycles. We find that allowing for correlated disturbances resolves some conflicts between estimates from DSGE models and those from vector autoregressions, and that a key missing ingredient in the models is countercyclical fiscal policy. According to our estimates, government spending and technology disturbances play a larger role in the business cycle than previously ascribed, while changes in markups are less important.
Subject(s):
Economic theory
Business
Item views:
169
Metadata:
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