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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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Cited by:
  1. Saroj Bhattarai & Jae Won Lee & Woong Yong Park, 2012. "Policy regimes, policy shifts, and U.S. business cycles," Globalization and Monetary Policy Institute Working Paper 109, Federal Reserve Bank of Dallas.
  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. 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).
  4. Kai Christoffel & Ivan Jaccard & Juha Kilponen, 2011. "Government bond risk premia and the cyclicality of fiscal policy," Working Paper Series 1411, European Central Bank.

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