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Fat-Tail Distributions and Business-Cycle Models

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  • Giorgio Fagiolo
  • Andrea Roventini
  • Guido Ascari

Abstract

Recent empirical findings suggest that macroeconomic variables are seldom normally dis- tributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) den- sities, 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 sta- tistical 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 Institute for New Economic Thinking (INET) in its series INET Research Notes with number 5.

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Date of creation: 01 Oct 2012
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Handle: RePEc:thk:rnotes:5

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  1. 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.
  2. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research, National Bank of Belgium 35, National Bank of Belgium.
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  5. Giorgio Fagiolo & Mauro Napoletano & Andrea Roventini, 2008. "Are output growth-rate distributions fat-tailed? some evidence from OECD countries," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 23(5), pages 639-669.
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  9. Giulio Bottazzi & Angelo Secchi, 2006. "Maximum Likelihood Estimation of the Symmetric and Asymmetric Exponential Power Distribution," LEM Papers Series 2006/19, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  10. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  11. 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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  13. Giorgio Fagiolo & Mauro Napoletano & Marco Piazza & Andrea Roventini, 2009. "Detrending and the Distributional Properties of U.S. Output Time Series," LEM Papers Series 2009/14, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  14. Carolina Castaldi & Sandro Sapio, 2008. "Growing like mushrooms? Sectoral evidence from four large European economies," Journal of Evolutionary Economics, Springer, Springer, vol. 18(3), pages 509-527, August.
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Blog mentions

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

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