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Statistical nonlinearities in the business cycle: A challenge for the canonical RBC model

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  • Valderrama, Diego

Abstract

Significant nonlinearities are found in several cyclical components macroeconomic time series across countries. Standard equilibrium models of business cycles successfully explain most first and second moments of these time series. Nevertheless, this paper shows that a model of this class cannot replicate nonlinear features of the data. Applying the Efficient Method of Moments (Gallant and Tauchen, 1996, 2000) methodology to build an algorithm that searches over the models parameter space establishes the parameterization that best allows replication of all statistical properties of the data. The results show that this parameterization captures nonlinearities in investment but fails to account for observed properties of consumption.
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  • Valderrama, Diego, 2007. "Statistical nonlinearities in the business cycle: A challenge for the canonical RBC model," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 2957-2983, September.
    • Handle: RePEc:eee:dyncon:v:31:y:2007:i:9:p:2957-2983
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    2. Altug, Sumru & Bildirici, Melike, 2010. "Business Cycles around the Globe: A Regime-switching Approach," CEPR Discussion Papers 7968, C.E.P.R. Discussion Papers.
    3. W D A Bryant, 2009. "General Equilibrium:Theory and Evidence," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6875, January.
    4. Jinghua Wang & Geoffrey Ngene, 2018. "Symmetric and asymmetric nonlinear causalities between oil prices and the U.S. economic sectors," Review of Quantitative Finance and Accounting, Springer, vol. 51(1), pages 199-218, July.
    5. Liddle, Brantley & Smyth, Russell & Zhang, Xibin, 2020. "Time-varying income and price elasticities for energy demand: Evidence from a middle-income panel," Energy Economics, Elsevier, vol. 86(C).
    6. Paul Oslington, 2012. "General Equilibrium: Theory and Evidence," The Economic Record, The Economic Society of Australia, vol. 88(282), pages 446-448, September.
    7. Diego Valderrama, 2002. "Nonlinearities in international business cycles," Working Paper Series 2002-23, Federal Reserve Bank of San Francisco.

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