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Technology shocks and aggregate fluctuations in an estimated hybrid RBC model

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  • Malley, Jim University of Glasgow
  • Woitek, Ulrich

Abstract

This paper contributes to the on-going empirical debate regarding the role of the RBC model and in particular of technology shocks in explaining aggregate fluctuations. To this end we estimate the model’s posterior density using Markov-Chain Monte-Carlo (MCMC) methods. Within this framework we extend Ireland’s (2001, 2004) 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. The results of marginal likelihood ratio tests reveal that the more general model of the errors significantly improves the model’s fit relative to the VAR and AR alternatives. Moreover, despite setting the RBC model a more difficult task under the VARMA specification, our analysis, based on forecast error and spectral decompositions, suggests that the RBC model is still capable of explaining a significant fraction of the observed variation in macroeconomic aggregates in the post-war U.S. economy.

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Bibliographic Info

Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2009-18.

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Date of creation: 2009
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Handle: RePEc:edn:sirdps:115

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Keywords: Real Business Cycle; Bayesian estimation; VARMA 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," IEW - Working Papers 416, Institute for Empirical Research in Economics - University of Zurich.
  2. Jim Malley & Ulrich Woitek, 2011. "Productivity Shocks and Aggregate Fluctuations in an Estimated Endogenous Growth Model with Human Capital," CESifo Working Paper Series 3567, CESifo Group Munich.
  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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