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Demand and productivity components of business cycles: Estimates and implications

  • Dufourt, Frederic

Standard stochastic growth models provide theoretical restrictions on output decomposition which can be used to investigate whether productivity shocks played a major role in observed business cycles. Applying these restrictions to US data leads to the following findings: i) Business cycles implied by productivity shocks are mildly correlated to overall fluctuations and help account for a few episodes of US postwar recessions. However, only 20% of US fluctuations can be explained by these shocks. ii) Most fluctuations seem instead to be due to "nominal demand" shocks, i.e. shocks which move output and prices in the same direction, but whose effects on output are ultimately transitory. iii) Canonical sticky price models in the New-Neoclassical Synthesis tradition can account for the cyclical comovements of output and prices, but canonical, frictionless, RBC models cannot.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 52 (2005)
Issue (Month): 6 (September)
Pages: 1089-1105

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Handle: RePEc:eee:moneco:v:52:y:2005:i:6:p:1089-1105
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