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Business Cycle Models and Stylized Facts in Germany

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  • Ertz, Guy

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

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    Abstract

    The aim of this paper is to test to what extent a benchmark real and monetary business cycle model can account for some basic stylized facts with a particular emphasis on monetary variables. We calibrate the model on German data using the method proposed by Cooley and Prescott (1995). First we will analyze the dynamic properties of the models, the Impulse Response Functions and propose a variance decomposition (for the monetary BC Models). We find that even though money is not neutral in the short run, the effect of a monetary shock is only marginal compared to the productivity shock, i.e. the share of the variance of the monetary shock in the total variance of the forecast error is small and decreases rapidly. We simulate the models and compare the properties of the model economies with those of the observed data. The evidence suggests that the benchmark RBC model can account for some stylized facts in Germany. The general pattern of the relative volatilities of investment, output and consumption is replicated by the model. Nevertheless, the overall volatility is too high and the level of the relative volatilities is not well reproduced. The introduction of exogenous monetary shocks and a cash-in-advance constraint increases the relative volatilities and the cross correlation of consumption. In general the second order moments of money (M1) and inflation are not well reproduced.

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    Bibliographic Info

    Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 1997005.

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    Length: 23
    Date of creation: 01 Oct 1996
    Date of revision: 00 Apr 1997
    Handle: RePEc:ctl:louvir:1997005

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    Keywords: business cycles; money; variance decomposition;

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    References

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    1. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
    2. Andrew B. Abel, 1985. "Dynamic Behavior of Capital Accumulation in a Cash-in-Advance Model," NBER Working Papers 1549, National Bureau of Economic Research, Inc.
    3. Plosser, C.I., 1989. "Understanding Real Business Cycles," RCER Working Papers 198, University of Rochester - Center for Economic Research (RCER).
    4. Backus, David K & Kehoe, Patrick J, 1992. "International Evidence of the Historical Properties of Business Cycles," American Economic Review, American Economic Association, American Economic Association, vol. 82(4), pages 864-88, September.
    5. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 8(3), pages 387-393.
    6. Fairise, X. & Hairault, J.O. & Langot, F. & Portier, F., 1992. "Ecriture et resolution du modele canonique des cycles reels," Papiers d'Economie Mathématique et Applications, Université Panthéon-Sorbonne (Paris 1) 92.30, Université Panthéon-Sorbonne (Paris 1).
    7. Martin Eichenbaum, 1990. "Real business cycle theory: wisdom or whimsy?," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago 90-13, Federal Reserve Bank of Chicago.
    8. Jean-Pierre DANTHINE & John B. DONALDSON, 1991. "Methodological and Empirical Issues in Real Business Cycle Theory," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 9102, Université de Lausanne, Faculté des HEC, DEEP.
    9. Fiorito, Riccardo & Kollintzas, Tryphon, 1994. "Stylized facts of business cycles in the G7 from a real business cycles perspective," European Economic Review, Elsevier, Elsevier, vol. 38(2), pages 235-269, February.
    10. Finn E. Kydland & Edward C. Prescott, 1990. "Business cycles: real facts and a monetary myth," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-18.
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    12. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 39-69, February.
    13. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 363-80, June.
    14. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall, pages 23-27.
    15. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 48(5), pages 1305-11, July.
    16. Blackburn, Keith & Ravn, Morten O, 1992. "Business Cycles in the United Kingdom: Facts and Fictions," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 59(236), pages 383-401, November.
    17. Bennett T. McCallum, 1988. "Real Business Cycle Models," NBER Working Papers 2480, National Bureau of Economic Research, Inc.
    18. Peter Brandner & Klaus Neusser, 1992. "Business cycles in open economies: Stylized facts for Austria and Germany," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 128(1), pages 67-87, March.
    19. Christopher A. Sims, 1996. "Macroeconomics and Methodology," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 10(1), pages 105-120, Winter.
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