Advanced Search
MyIDEAS: Login to save this paper or follow this series

Are Structural VARs with Long-Run Restrictions Useful in Developing Business Cycle Theory?

Contents:

Author Info

  • V. V. Chari
  • Patrick J. Kehoe
  • Ellen R. McGrattan

Abstract

The central finding of the recent structural vector autoregression (SVAR) literature with a differenced specification of hours is that technology shocks lead to a fall in hours. Researchers have used this finding to argue that real business cycle models are unpromising. We subject this SVAR specification to a natural economic test by showing that when applied to data generated from a multiple-shock business cycle model, the procedure incorrectly concludes that the model could not have generated the data as long as demand shocks play a nontrivial role. We also test another popular specification, which uses the level of hours, and show that with nontrivial demand shocks, it cannot distinguish between real business cycle models and sticky price models. The crux of the problem for both SVAR specifications is that available data necessitate a VAR with a small number of lags and, when demand shocks play a nontrivial role, such a VAR is a poor approximation to the model's infinite order VAR.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w14430.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14430.

as in new window
Length:
Date of creation: Oct 2008
Date of revision:
Publication status: published as Chari, V.V. & Kehoe, Patrick J. & McGrattan, Ellen R., 2008. "Are structural VARs with long-run restrictions useful in developing business cycle theory?," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1337-1352, November.
Handle: RePEc:nbr:nberwo:14430

Note: EFG
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2007. "Business Cycle Accounting," Econometrica, Econometric Society, Econometric Society, vol. 75(3), pages 781-836, 05.
  2. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  3. Anderson, Evan W. & McGrattan, Ellen R. & Hansen, Lars Peter & Sargent, Thomas J., 1996. "Mechanics of forming and estimating dynamic linear economies," Handbook of Computational Economics, Elsevier, in: H. M. Amman & D. A. Kendrick & J. Rust (ed.), Handbook of Computational Economics, edition 1, volume 1, chapter 4, pages 171-252 Elsevier.
  4. Jess Benhabib & Richard Rogerson & Randall Wright, 1991. "Homework in macroeconomics: household production and aggregate fluctuations," Staff Report, Federal Reserve Bank of Minneapolis 135, Federal Reserve Bank of Minneapolis.
  5. Gali, J., 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," Working Papers, C.V. Starr Center for Applied Economics, New York University 96-28, C.V. Starr Center for Applied Economics, New York University.
  6. Christopher J. Erceg & Luca Guerrieri, 2004. "Can Long-Run Restrictions Identify Technology Shocks?," Computing in Economics and Finance 2004, Society for Computational Economics 3, Society for Computational Economics.
  7. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  8. Francis, Neville & Ramey, Valerie A., 2005. "Is the technology-driven real business cycle hypothesis dead? Shocks and aggregate fluctuations revisited," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(8), pages 1379-1399, November.
  9. Finn E. Kydland & Edward C. Prescott, 1989. "Hours and employment variation in business cycle theory," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 17, Federal Reserve Bank of Minneapolis.
  10. Hall, Robert E, 1997. "Macroeconomic Fluctuations and the Allocation of Time," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 15(1), pages S223-50, January.
  11. Cogley, Timothy & Nason, James M, 1995. "Output Dynamics in Real-Business-Cycle Models," American Economic Review, American Economic Association, American Economic Association, vol. 85(3), pages 492-511, June.
  12. Jesus Fernandez-Villaverde & Juan Rubio-Ramirez & Thomas J. Sargent, 2005. "A, B, C's (and D)'s for Understanding VARs," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0308, National Bureau of Economic Research, Inc.
  13. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 2(1), pages 7-46, May.
  14. Galí, Jordi & Lopez-Salido, Jose David & Vallés Liberal, Javier, 2002. "Technology Shocks and Monetary Policy: Assessing the Fed's Performance," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3211, C.E.P.R. Discussion Papers.
  15. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What Happens After a Technology Shock?," NBER Working Papers 9819, National Bureau of Economic Research, Inc.
  16. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Staff Report, Federal Reserve Bank of Minneapolis 102, Federal Reserve Bank of Minneapolis.
  17. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2006. "Assessing structural VARs," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 866, Board of Governors of the Federal Reserve System (U.S.).
  18. Marvin Goodfriend & Robert King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296 National Bureau of Economic Research, Inc.
  19. Uhlig, H.F.H.V.S., 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," Discussion Paper, Tilburg University, Center for Economic Research 1999-28, Tilburg University, Center for Economic Research.
  20. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 870, Cowles Foundation for Research in Economics, Yale University.
  21. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  22. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-03, C.V. Starr Center for Applied Economics, New York University.
  23. Gali, Jordi, 1992. "How Well Does the IS-LM Model Fit Postwar U.S. Data," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(2), pages 709-38, May.
  24. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper, Federal Reserve Bank of Cleveland 9019, Federal Reserve Bank of Cleveland.
  25. 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.
  26. Julio J. Rotemberg & Michael Woodford, 1989. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," NBER Working Papers 3206, National Bureau of Economic Research, Inc.
  27. Greenwood, J. & Hercowitz, Z., 1991. "The Allocation of Capital and Time Over the Business Cycles," UWO Department of Economics Working Papers, University of Western Ontario, Department of Economics 9104, University of Western Ontario, Department of Economics.
  28. Bencivenga, Valerie R, 1992. "An Econometric Study of Hours and Output Variation with Preference Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 449-71, May.
  29. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 2000. "The role of investment-specific technological change in the business cycle," European Economic Review, Elsevier, Elsevier, vol. 44(1), pages 91-115, January.
  30. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 155, University of Rochester - Center for Economic Research (RCER).
  31. Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," Working Paper, Federal Reserve Bank of Atlanta 94-2, Federal Reserve Bank of Atlanta.
  32. McGrattan, Ellen R., 1994. "The macroeconomic effects of distortionary taxation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(3), pages 573-601, June.
  33. Anton Braun, R., 1994. "Tax disturbances and real economic activity in the postwar United States," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(3), pages 441-462, June.
  34. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series, Federal Reserve Bank of Chicago WP-01-08, Federal Reserve Bank of Chicago.
  35. Jordi Galí & Pau Rabanal, 2004. "Technology Shocks and Aggregate Fluctuations," IMF Working Papers, International Monetary Fund 04/234, International Monetary Fund.
  36. Christopher A. Sims, 1989. "Models and their uses," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 11, Federal Reserve Bank of Minneapolis.
  37. Lippi, Marco & Reichlin, Lucrezia, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 83(3), pages 644-52, June.
  38. Neville Francis & Valerie A. Ramey, 2002. "Is the Technology-Driven Real Business Cycle Hypothesis Dead?," NBER Working Papers 8726, National Bureau of Economic Research, Inc.
  39. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2007. "Are structural VARs with long-run restrictions useful in developing business cycle theory?," Staff Report, Federal Reserve Bank of Minneapolis 364, Federal Reserve Bank of Minneapolis.
  40. Hans M. Amman & David A. Kendrick, . "Computational Economics," Online economics textbooks, SUNY-Oswego, Department of Economics, SUNY-Oswego, Department of Economics, number comp1, Spring.
  41. Jonas D. M. Fisher, 2006. "The Dynamic Effects of Neutral and Investment-Specific Technology Shocks," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 114(3), pages 413-451, June.
  42. Burmeister, Edwin & Wall, Kent D & Hamilton, James D, 1986. "Estimation of Unobserved Expected Monthly Inflation Using Kalman Filtering," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 4(2), pages 147-60, April.
  43. 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, Elsevier, vol. 21(2-3), pages 195-232.
  44. Cooley, Thomas F. & Dwyer, Mark, 1998. "Business cycle analysis without much theory A look at structural VARs," Journal of Econometrics, Elsevier, Elsevier, vol. 83(1-2), pages 57-88.
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Matching Theory and Data: Bayesian Vector Autoregression and Dynamic Stochastic General Equilibrium Models
    by Christian Zimmermann in NEP-DGE blog on 2009-09-27 01:45:04
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is featured on the following reading lists or Wikipedia pages:
  1. Advanced Monetary Theory and Policy (ECON 447)

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:14430. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.