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Letting Different Views about Business Cycles Compete

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  • Paul Beaudry
  • Bernd Lucke

Abstract

There are several candidate explanations for macro-fluctuations. Two of the most common discussed sources are surprise changes in disembodied technology and monetary innovations. Another popular explanation is found under the heading of a preference or more generally a demand shock. More recently two other explanations have been advocated: surprise changes in investment specific technology and news about future technology growth. The aim of this paper is to provide a quantitative assessment of the relative merits of all these explanations by adopting a framework which allows them to compete. In particular, we propose a co-integrated SVAR approach that encompasses all 5 shocks and thereby offers a coherent evaluation of the dynamics they induce as well as their contribution to macro volatility. Our main finding is that surprise changes in technology, whether it be of the disembodied or embodied nature, account for very little of fluctuations. In contrast, expected changes in technology appear to be an important force, with preference/demand shocks and monetary shocks also playing non-negligible roles.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14950.

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Date of creation: May 2009
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Publication status: published as Letting Different Views about Business Cycles Compete , Paul Beaudry, Bernd Lucke. in NBER Macroeconomics Annual 2009, Volume 24 , Acemoglu, Rogoff, and Woodford. 2010
Handle: RePEc:nbr:nberwo:14950

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  1. Jordi Gali, 1999. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," American Economic Review, American Economic Association, American Economic Association, vol. 89(1), pages 249-271, March.
  2. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2008. "Are Structural VARs with Long-Run Restrictions Useful in Developing Business Cycle Theory?," NBER Working Papers 14430, National Bureau of Economic Research, Inc.
  3. Bagliano, Fabio-Cesare & Favero, Carlo A, 1997. "Measuring Monetary Policy with VAR Models: An Evaluation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1743, C.E.P.R. Discussion Papers.
  4. Lawrence J. Christiano & Martin Eichenbaum & Robert J. Vigfusson, 2003. "The response of hours to a technology shock: evidence based on direct measures of technology," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 790, Board of Governors of the Federal Reserve System (U.S.).
  5. 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.
  6. Lucke, Bernd, 2010. "Identification and overidentification in SVECMs," Economics Letters, Elsevier, Elsevier, vol. 108(3), pages 318-321, September.
  7. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1996. "Long-Run Implications of Investment-Specific Technological Change," RCER Working Papers 420, University of Rochester - Center for Economic Research (RCER).
  8. Beaudry, Paul & Portier, Franck, 2003. "Stock Prices, News and Economic Fluctuations," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3844, C.E.P.R. Discussion Papers.
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