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Can Modern Theories of Structural Change Fit Business Cycles Data?

Author

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  • Rubini, Loris
  • Moro, Alessio

Abstract

We investigate the ability of workhorse structural change models to account for the business cycle properties of an economy. We consider three preference specifications: Herrendorf, Rogerson and Valentinyi (2014, HRV), Boppart (2014, BOP), and Comin, Lashkari and Mestieri (2021, CLM), paired with standard sectoral production functions subject to random total factor productivity (TFP) shocks. In each case, we estimate preference parameters using long-run structural change data and calibrate sectoral TFP processes on observed relative prices with a procedure common across models. All models generate substantially less aggregate volatility than in the data, and none accounts for the full set of business cycle facts: CLM performs best on sectoral consumption volatility and on aggregate comovement, HRV alone delivers procyclical aggregate labor, and BOP best captures the cyclicality of consumption and the relative volatility of investment. We investigate the role of the effective intertemporal elasticity of substitution and the income and substitution effects implied by each preference specification in generating these differences across models.

Suggested Citation

  • Rubini, Loris & Moro, Alessio, 2024. "Can Modern Theories of Structural Change Fit Business Cycles Data?," CEPR Discussion Papers 18879, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:18879
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    Cited by:

    1. Germaschewski, Yin & Horvath, Jaroslav & Rubini, Loris, 2026. "Expropriations and cross-country heterogeneity in consumption volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 185(C).

    More about this item

    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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