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Business Cycle Models and Stylized Facts in Germany

  • Ertz, Guy

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

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    The aim of this paper is to test to what extent a benchmark real and monetary business cycle model can account for some basic stylized facts with a particular emphasis on monetary variables. We calibrate the model on German data using the method proposed by Cooley and Prescott (1995). First we will analyze the dynamic properties of the models, the Impulse Response Functions and propose a variance decomposition (for the monetary BC Models). We find that even though money is not neutral in the short run, the effect of a monetary shock is only marginal compared to the productivity shock, i.e. the share of the variance of the monetary shock in the total variance of the forecast error is small and decreases rapidly. We simulate the models and compare the properties of the model economies with those of the observed data. The evidence suggests that the benchmark RBC model can account for some stylized facts in Germany. The general pattern of the relative volatilities of investment, output and consumption is replicated by the model. Nevertheless, the overall volatility is too high and the level of the relative volatilities is not well reproduced. The introduction of exogenous monetary shocks and a cash-in-advance constraint increases the relative volatilities and the cross correlation of consumption. In general the second order moments of money (M1) and inflation are not well reproduced.

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    Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 1997005.

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    Length: 23
    Date of creation: 01 Oct 1996
    Date of revision: 00 Apr 1997
    Handle: RePEc:ctl:louvir:1997005
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    17. Fiorito, Riccardo & Kollintzas, Tryphon, 1992. "Stylized Facts of Business Cycles in the G7 from a Real Business Cycles Perspective," CEPR Discussion Papers 681, C.E.P.R. Discussion Papers.
    18. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, vol. 74(3), pages 363-80, June.
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