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Two flaws in business cycle dating

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  • Lawrence J. Christiano
  • Joshua M. Davis

Abstract

Using “business cycle accounting,” Chari, Kehoe, and McGrattan (2006) conclude that models of financial frictions which create a wedge in the intertemporal Euler equation are not promising avenues for modeling business cycle dynamics. There are two reasons that this conclusion is not warranted. First, small changes in the implementation of business cycle accounting overturn Chari, Kehoe, and McGrattan’s conclusions. Second, one way that shocks to the intertemporal wedge affect the economy is by their spillover effects onto other wedges. This potentially important mechanism for the transmission of intertemporal-wedge shocks is not identified under business cycle accounting. Chari, Kehoe, and McGrattan potentially understate the importance of these shocks by adopting the extreme position that spillover effects are zero.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0612.

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Date of creation: 2006
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Handle: RePEc:fip:fedcwp:0612

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Keywords: Business cycles;

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Cited by:
  1. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2013. "Risk Shocks," NBER Working Papers 18682, National Bureau of Economic Research, Inc.

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