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Learning and structural change in macroeconomic data

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  • James B. Bullard
  • John Duffy

Abstract

We include learning in a standard equilibrium business cycle model with explicit growth. We use the model to study how the economy's agents could learn in real time about the important trend-changing events of the postwar era in the U.S., such as the productivity slowdown, increased labor force participation by women, and the "new economy" of the 1990s. We find that a large fraction of the observed variance of output relative to trend can be attributed to structural change in our model. However, we also find that the addition of learning and occasional structural breaks to the standard and widely-used growth model results in a balanced growth puzzle, as our approach cannot completely account for observed trends in U.S. aggregate consumption and investment. Finally, we argue that a model-consistent detrending approach, such as the one we suggest here, is necessary if the goal is to obtain an accurate assessment of an equilibrium business cycle model.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2004-016.

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Date of creation: 2004
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Handle: RePEc:fip:fedlwp:2004-016

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Keywords: Business cycles ; Economic development;

References

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  17. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
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  22. Bruce E. Hansen, 2001. "The New Econometrics of Structural Change: Dating Breaks in U.S. Labour Productivity," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 117-128, Fall.
  23. Rotemberg, Julio J & Woodford, Michael, 1996. "Real-Business-Cycle Models and the Forecastable Movements in Output, Hours, and Consumption," American Economic Review, American Economic Association, vol. 86(1), pages 71-89, March.
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