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What’s News in Business Cycles

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  • Schmitt-Grohé, Stephanie
  • Uribe, Martín

Abstract

In this paper, we perform a structural Bayesian estimation of the contribution of anticipated shocks to business cycles in the postwar United States. Our theoretical framework is a real-business-cycle model augmented with four real rigidities: investment adjustment costs, variable capacity utilization, habit formation in consumption, and habit formation in leisure. Business cycles are assumed to be driven by permanent and stationary neutral productivity shocks, permanent investment-specific shocks, and government spending shocks. Each of these driving forces is buffeted by four types of structural innovations: unanticipated innovations and innovations anticipated one, two, and three quarters in advance. We find that anticipated shocks account for more than two thirds of predicted aggregate fluctuations.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7201.

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Date of creation: Mar 2009
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Handle: RePEc:cpr:ceprdp:7201

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Keywords: anticipated shocks; Bayesian estimation; sources of aggregate fluctuations;

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References

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  1. Paul Beaudry & Franck Portier, 2004. "Stock Prices, News and Economic Fluctuations," NBER Working Papers 10548, National Bureau of Economic Research, Inc.
  2. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
  3. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2008. "Investment shocks and business cycles," Staff Reports 322, Federal Reserve Bank of New York.
  4. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
  5. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," 2006 Meeting Papers 31, Society for Economic Dynamics.
  6. Cogley, Timothy & Nason, James M, 1995. "Output Dynamics in Real-Business-Cycle Models," American Economic Review, American Economic Association, vol. 85(3), pages 492-511, June.
  7. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  8. Ravn, Morten O. & Schmitt-Grohé, Stephanie & Uribe, Martín, 2007. "Explaining the Effects of Government Spending Shocks on Consumption and the Real Exchange Rate," CEPR Discussion Papers 6541, C.E.P.R. Discussion Papers.
  9. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2008. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," IMES Discussion Paper Series 08-E-16, Institute for Monetary and Economic Studies, Bank of Japan.
  10. Sungbae An & Frank Schorfheide, 2006. "Bayesian analysis of DSGE models," Working Papers 06-5, Federal Reserve Bank of Philadelphia.
  11. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  12. Martin Lettau & Harald Uhlig, 2000. "Can Habit Formation be Reconciled with Business Cycle Facts?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 79-99, January.
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