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Fat-Tail Distributions and Business-Cycle Models

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  • Guido Ascari

    ()
    (Università di Pavia)

  • Giorgio Fagiolo

    ()
    (Sant'Anna School of Advanced Studies, Pisa)

  • Andrea Roventini

    ()
    (Department of Economics (University of Verona))

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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Bibliographic Info

Paper provided by University of Verona, Department of Economics in its series Working Papers with number 02/2012.

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Length: 14
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:ver:wpaper:02/2012

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

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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.
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  12. Giulio Bottazzi & Angelo Secchi, 2003. "Sectoral Specifities in the Dynamics of U.S. Manufacturing Firms," LEM Papers Series, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy 2003/18, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  13. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  14. Giulio Bottazzi & Angelo Secchi, 2006. "Maximum Likelihood Estimation of the Symmetric and Asymmetric Exponential Power Distribution," LEM Papers Series, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy 2006/19, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
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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, 2012. "Rare shocks, great recessions," Staff Reports, Federal Reserve Bank of New York 585, Federal Reserve Bank of New York.
  2. Giorgio Fagiolo & Andrea Roventini, 2012. "Macroeconomic Policy in DSGE and Agent-Based Models," Working Papers, University of Verona, Department of Economics 07/2012, University of Verona, Department of Economics.

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