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Correlated Disturbances and U.S. Business Cycles

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  • Ricardo Reis

    (Columbia University)

  • Vasco Curdia

    (FRB New York)

Abstract

The dynamic stochastic general equilibrium (DSGE) models used to study business cycles typically assume that exogenous disturbances are independent with a simple structure for serial correlation. This paper relaxes this tight restriction, by allowing for disturbances that have a rich contemporaneous and dynamic correlation structure. Our first contribution is a new Bayesian econometric method that uses conjugate conditionals to make the estimation of DSGE models with correlated disturbances feasible and quick. Our second contribution is a re-examination of the sources of U.S. business cycles, using two canonical models, one real and the other monetary. We find that when we allow for correlated disturbances, the estimates of crucial parameters are more in line with other evidence, the impulse responses are closer to the results from vector autoregressions, and government spending and technology disturbances play a larger role in the business cycle, while changes in markups are unimportant

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 129.

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Date of creation: 2009
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Handle: RePEc:red:sed009:129

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  1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2006. "Business cycle accounting," Staff Report 328, Federal Reserve Bank of Minneapolis.
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Cited by:
  1. Fève, Patrick & Sahuc, Jean-Guillaume, 2013. "On the Size of the Government Spending Multiplier in the Euro Area," IDEI Working Papers 776, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2013.
  2. Fabio Milani, 2011. "Expectation Shocks and Learning as Drivers of the Business Cycle," Economic Journal, Royal Economic Society, vol. 121(552), pages 379-401, 05.
  3. Woong Yong Park & Jae Won Lee & Saroj Bhattarai, 2012. "Policy Regimes, Policy Shifts, and U.S. Business Cycles," 2012 Meeting Papers 287, Society for Economic Dynamics.
  4. István Kónya, 2011. "Convergence and Distortions: the Czech Republic, Hungary and Poland between 1996–2009," MNB Working Papers 2011/6, Magyar Nemzeti Bank (the central bank of Hungary).
  5. Gospodinov, Nikolay & Lkhagvasuren, Damba, 2013. "A moment-matching method for approximating vector autoregressive processes by finite-state Markov chains," Working Paper 2013-05, Federal Reserve Bank of Atlanta.
  6. Pablo A Guerron-Quintana & James M Nason, 2012. "Bayesian Estimation of DSGE Models," CAMA Working Papers 2012-10, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. Christoffel, Kai & Jaccard, Ivan & Kilponen, Juha, 2011. "Government bond risk premia and the cyclicality of fiscal policy," Working Paper Series 1411, European Central Bank.
  8. Kónya, István, 2011. "Növekedés és felzárkózás Magyarországon, 1995-2009
    [Growth and convergence in Hungary, 1995-2009]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(5), pages 393-411.

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