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Measurement with Some Theory: a New Approach to Evaluate Business Cycle Models (with appendices)

  • Fabio Canova
  • Matthias Paustian

We propose a method to evaluate cyclical models which does not require knowledge of the DGP and the exact specification of the aggregate decision rules. We derive robust restrictions in a class of models; use some to identify structural shocks in the data and others to evaluate the class or contrast sub-models. The approach has good properties, even in small samples and when the likelihood is misspecified. We showhow to sort out the relevance of a certain friction (the presence of rule-of-thumb consumers) in a standard class of models.

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File URL: http://research.barcelonagse.eu/tmp/working_papers/511.pdf
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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 511.

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Date of creation: Oct 2010
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Handle: RePEc:bge:wpaper:511
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