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Fat-Tail Distributions and Business-Cycle Models

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  • Guido Ascari
  • Giorgio Fagiolo
  • Andrea Roventini

Abstract

Recent empirical findings suggest that macroeconomic variables are seldom normally distributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) densities, with Laplace fat tails. In this work, we assess whether Real Business Cycle (RBC) and standard medium-scale New-Keynesian (NK) models are able to replicate this statistical regularity. We simulate both models drawing Gaussian- vs Laplace-distributed shocks and we explore the statistical properties of simulated time series. Our results cast doubts on whether RBC and NK models are able to provide a satisfactory representation of the transmission mechanisms linking exogenous shocks to macroeconomic dynamics.

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Paper provided by Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy in its series LEM Papers Series with number 2012/02.

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Date of creation: 18 Jan 2012
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Handle: RePEc:ssa:lemwps:2012/02

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Keywords: Growth-Rate Distributions; Normality; Fat Tails; Time Series; Exponential-Power Distributions; Laplace Distributions; DSGE Models; RBC Models;

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  1. 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.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Fat-tail Distributions and Business-Cycle Models
    by Christian Zimmermann in NEP-DGE blog on 2012-02-23 03:25:12
  2. What's wrong with economics?
    by chris dillow in Stumbling and Mumbling on 2012-06-10 11:32:34
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Cited by:
  1. Giorgio Fagiolo & Andrea Roventini, 2012. "Macroeconomic Policy in DSGE and Agent-Based Models," INET Research Notes 6, Institute for New Economic Thinking (INET).
  2. Vasco Cúrdia & Marco Del Negro & Daniel L. Greenwald, 2013. "Rare shocks, Great Recessions," Working Paper Series 2013-01, Federal Reserve Bank of San Francisco.

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