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On the Sources of Business Cycles: Implications for DSGE Models

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Listed:
  • Michal Andrle
  • Jan Bruha
  • Serhat Solmaz

Abstract

What are the drivers of business cycle fluctuations? And how many are there? By documenting strong and predictable co-movement of real variables during the business cycle in a sample of advanced economies, we argue that most business cycle fluctuations are driven by one major factor. The positive co-movement of real output and inflation convincingly argues for a demand story. This feature-robust across time and space-provides a simple smell test for structural macroeconomic models. We propose a simple statistic that can compare data and models. Based on this statistic, we show that the recent vintage of structural economic models has difficulties replicating the stylized facts we document.

Suggested Citation

  • Michal Andrle & Jan Bruha & Serhat Solmaz, 2016. "On the Sources of Business Cycles: Implications for DSGE Models," Working Papers 2016/03, Czech National Bank.
  • Handle: RePEc:cnb:wpaper:2016/03
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    References listed on IDEAS

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    1. S. Rebelo., 2010. "Real Business Cycle Models: Past, Present, and Future," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 10.
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    Cited by:

    1. Olkhov, Victor, 2018. "The Business Cycle Model Beyond General Equilibrium," MPRA Paper 87204, University Library of Munich, Germany.
    2. Michal Andrle & Jan Bruha & Serhat Solmaz, 2016. "Output and Inflation Co-movement; An Update on Business-Cycle Stylized Facts," IMF Working Papers 16/241, International Monetary Fund.
    3. Jan Bruha & Jiri Polansky, 2015. "Empirical Analysis of Labor Markets over Business Cycles: An International Comparison," Working Papers 2015/15, Czech National Bank.

    More about this item

    Keywords

    Business cycle; demand shocks; DSGE models; dynamic principal component analysis;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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