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Technology shocks and aggregate fluctuations in an estimated hybrid RBC model

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  • Malley, Jim
  • Woitek, Ulrich

Abstract

This paper contributes to the on-going empirical debate regarding the role of the RBC model and in particular of neutral and investment-specific technology shocks in explaining aggregate fluctuations. To achieve this, we estimate the model's posterior density using Bayesian methods. Within this framework we first extend (Ireland, 2001b) and (Ireland, 2004a) hybrid estimation approach to allow for a vector autoregressive moving average (VARMA) process to describe the movements and co-movements of the model's errors not explained by the basic RBC model. Our main findings for the model with neutral technical change are: (i) the VARMA specification of the errors significantly improves the hybrid model's fit to the historical data relative to the VAR and AR alternatives; and (ii) despite setting the RBC model a more difficult task under the VARMA specification, neutral technology shocks are still capable of explaining a significant share of the observed variation in output and its components over shorter- and longer-forecast horizons as well as hours at shorter horizons. When the hybrid model is extended to incorporate investment shocks, we find that: (iii) the VAR specification is preferred to the alternatives; and (iv) the model's ability to explain fluctuations improves considerably.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 7 (July)
Pages: 1214-1232

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:7:p:1214-1232

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Real business cycle Bayesian estimation Technology shocks Measurement errors;

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Citations

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Cited by:
  1. Jim Malley & Ulrich Woitek, 2009. "Productivity Shocks and Aggregate Cycles in an Estimated Endogenous Growth Model," CESifo Working Paper Series 2672, CESifo Group Munich.
  2. Jim Malley & Ulrich Woitek, 2011. "Productivity shocks and aggregate fluctuations in an estimated endogenous growth model with human capital," Working Papers 2011_20, Business School - Economics, University of Glasgow.
  3. Alessia Paccagnini, 2012. "Comparing Hybrid DSGE Models," Working Papers 228, University of Milano-Bicocca, Department of Economics, revised Dec 2012.

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