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An Application of Business Cycle Accounting with Misspecified Wedges

  • NUTAHARA Kengo
  • INABA Masaru

It is often assumed that wedges evolve according to the VAR (1) in the applications of business cycle accounting (BCA). However, recent research finds that the wedges have no VAR (1) representation in many dynamic stochastic general equilibrium(DSGE) economies, and that there might be a misspecification of the stochastic process of wedges. In order to assess the empirical usefulness of BCA, we apply BCA to a widely used medium-scale DSGE economy. Based on our experiments, we find that the accuracy of the measurement of wedges is high enough to capture the business cycle implications of wedges.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 11005.

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Length: 18 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:eti:dpaper:11005
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  1. Otsu Keisuke, 2010. "A Neoclassical Analysis of the Asian Crisis: Business Cycle Accounting for a Small Open Economy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-39, July.
  2. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
  3. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2003. "Accounting for the Great Depression," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 2-8.
  4. Erasmus Kristoffer Kersting, 2008. "The 1980s Recession in the UK: A Business Cycle Accounting Perspective," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 179-191, January.
  5. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2006. "Business cycle accounting," Staff Report 328, Federal Reserve Bank of Minneapolis.
  6. Kobayashi, Keiichiro & Inaba, Masaru, 2006. "Business cycle accounting for the Japanese economy," Japan and the World Economy, Elsevier, vol. 18(4), pages 418-440, December.
  7. NUTAHARA Kengo & INABA Masaru, 2008. "On Equivalence Results in Business Cycle Accounting," Discussion papers 08015, Research Institute of Economy, Trade and Industry (RIETI).
  8. Gregor Baeurle & Daniel Burren, 2007. "A Note on Business Cycle Accounting," Diskussionsschriften dp0705, Universitaet Bern, Departement Volkswirtschaft.
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