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Technology shocks and aggregate fluctuations in an estimated hybrid RBC model

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  • Jim Malley
  • Ulrich Woitek

Abstract

This paper contributes to the on-going empirical debate regarding the role of the RBC model and in particular of technology shocks in explaining aggregate fluctuations. To this end we estimate the model’s posterior density using Markov-Chain Monte-Carlo (MCMC) methods. Within this framework we extend Ireland’s (2001, 2004) hybrid estimation approach to allow for a vector autoregressive moving average (VARMA) process to describe the movements and co-movements of the model’s errors not explained by the basic RBC model. The results of marginal likelihood ratio tests reveal that the more general model of the errors significantly improves the model’s fit relative to the VAR and AR alternatives. Moreover, despite setting the RBC model a more difficult task under the VARMA specification, our analysis, based on forecast error and spectral decompositions, suggests that the RBC model is still capable of explaining a significant fraction of the observed variation in macroeconomic aggregates in the post-war U.S. economy.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 408.

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Date of creation: Apr 2009
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Handle: RePEc:zur:iewwpx:408

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Keywords: Real Business Cycle; Bayesian estimation; VARMA errors;

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Citations

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Cited by:
  1. Jim Malley & Ulrich Woitek, 2009. "Productivity shocks and aggregate cycles in an estimated endogenous growth model," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 416, Institute for Empirical Research in Economics - University of Zurich.
  2. Jim Malley & Ulrich Woitek, 2011. "Productivity Shocks and Aggregate Fluctuations in an Estimated Endogenous Growth Model with Human Capital," CESifo Working Paper Series 3567, CESifo Group Munich.
  3. Malley, James & Woitek, Ulrich, 2011. "Productivity shocks and aggregate fluctuations in an estimated endogenous growth model with human capital," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2011-71, Scottish Institute for Research in Economics (SIRE).
  4. Alessia Paccagnini, 2012. "Comparing Hybrid DSGE Models," Working Papers, University of Milano-Bicocca, Department of Economics 228, University of Milano-Bicocca, Department of Economics, revised Dec 2012.

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