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Shocks and frictions in US business cycles: a Bayesian DSGE approach

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Author Info
Frank Smets () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Rafael Wouters () (National Bank of Belgium, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.)

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Abstract

Using a Bayesian likelihood approach, we estimate a dynamic stochastic general equilibrium model for the US economy using seven macro-economic time series. The model incorporates many types of real and nominal frictions and seven types of structural shocks. We show that this model is able to compete with Bayesian Vector Autoregression models in out-of-sample prediction. We investigate the relative empirical importance of the various frictions. Finally, using the estimated model we address a number of key issues in business cycle analysis: What are the sources of business cycle fluctuations? Can the model explain the cross-correlation between output and inflation? What are the effects of productivity on hours worked? What are the sources of the “Great Moderation”? JEL Classification: E4-E5.

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Paper provided by European Central Bank in its series Working Paper Series with number 722.

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Length: 57 pages
Date of creation: Feb 2007
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Handle: RePEc:ecb:ecbwps:20070722

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Keywords: Keywords: DSGE models; monetary policy;

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References listed on IDEAS
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  21. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09. [Downloadable!] (restricted)
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  22. Dedola, Luca & Neri, Stefano, 2004. "What Does A Technology Shock Do? A VAR Analysis with Model-based Sign Restrictions," CEPR Discussion Papers 4537, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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