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Dynamic General Equilibrium Models and the Beveridge-Nelson Facts

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Dufourt (BETA - University Louis Pasteur)

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Abstract

Linear and Hodrick-Prescott detrending methods do not provide a good approximation of the business cycle when output contains a unit root. I use the multivariate Beveridge-Nelson decomposition to document the main patterns of US postwar business cycles when output and some other variables are assumed to be integrated I(1) processes. I show that the business cycle identified in this way displays some important differences with those obtained from the preceding methods. I then evaluate the ability of various dynamic stochastic general equilibrium (DSGE) models to replicate the main aspects of this business cycle. Among competing models, I find that the best specification involves an economy hit simultaneously by both technological and monetary shocks, in a context of price stickiness and limited (but insufficient) accommodation by the monetary authorities. Hence, the data favor the model advocated by the New-Neoclassical Synthesis rather than its purely classical (RBC type and flexible price) counterparts.

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Paper provided by EconWPA in its series Macroeconomics with number 0501003.

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Date of creation: 05 Jan 2005
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Handle: RePEc:wpa:wuwpma:0501003

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Related research
Keywords: Business cycles; Beveridge-Nelson decomposition; Prices rigidity;

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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References listed on IDEAS
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  6. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Benhabib, Jess & Wen, Yi, 2001. "Indeterminacy, Aggregate Demand, and the Real Business Cycle," Working Papers 01-09r, Cornell University, Center for Analytic Economics. [Downloadable!]
    Other versions:
  2. Dufourt, 2005. "Demand and productivity components of business cycles: Estimates and implications," Macroeconomics 0501013, EconWPA, revised 08 Sep 2005. [Downloadable!]
    Other versions:
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