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Two flaws in business cycle dating

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  • Lawrence J. Christiano
  • Joshua M. Davis

Abstract

Using “business cycle accounting,” Chari, Kehoe, and McGrattan (2006) conclude that models of financial frictions which create a wedge in the intertemporal Euler equation are not promising avenues for modeling business cycle dynamics. There are two reasons that this conclusion is not warranted. First, small changes in the implementation of business cycle accounting overturn Chari, Kehoe, and McGrattan’s conclusions. Second, one way that shocks to the intertemporal wedge affect the economy is by their spillover effects onto other wedges. This potentially important mechanism for the transmission of intertemporal-wedge shocks is not identified under business cycle accounting. Chari, Kehoe, and McGrattan potentially understate the importance of these shocks by adopting the extreme position that spillover effects are zero.

Suggested Citation

  • Lawrence J. Christiano & Joshua M. Davis, 2006. "Two flaws in business cycle dating," Working Papers (Old Series) 0612, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:0612
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Andrea Ajello, 2016. "Financial Intermediation, Investment Dynamics, and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 106(8), pages 2256-2303, August.
    2. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78-121.
    3. repec:eee:macchp:v2-1013 is not listed on IDEAS
    4. Brinca, Pedro, 2014. "Distortions in the neoclassical growth model: A cross-country analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 1-19.
    5. Hirata, Hideaki & Otsu, Keisuke, 2016. "Accounting for the economic relationship between Japan and the Asian Tigers," Journal of the Japanese and International Economies, Elsevier, vol. 41(C), pages 57-68.
    6. Franck Portier, 2008. "Interprétation d'épisodes historiques à l'aide de modèles dynamiques stochastiques d'équilibre général," Economie & Prévision, La Documentation Française, vol. 0(4), pages 33-46.
    7. Özer Karagedikli & Troy Matheson & Christie Smith & Shaun P. Vahey, 2010. "RBCs AND DSGEs: THE COMPUTATIONAL APPROACH TO BUSINESS CYCLE THEORY AND EVIDENCE," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 113-136, February.
    8. Dooyeon Cho & Dong-Eun Rhee, 2015. "An assessment of inflation targeting in a quantitative monetary business cycle framework: evidence from four early adopters," Applied Economics, Taylor & Francis Journals, vol. 47(32), pages 3395-3413, July.
    9. repec:eee:jmacro:v:56:y:2018:i:c:p:65-88 is not listed on IDEAS
    10. Slim BRIDJI, 2007. "Accounting for the French Great Depression," 2007 Meeting Papers 461, Society for Economic Dynamics.
    11. Pancrazi, Roberto & Seoane, Hernán D. & Vukotic, Marija, 2016. "The price of capital and the financial accelerator," Economics Letters, Elsevier, vol. 149(C), pages 86-89.
    12. Brinca, P. & Chari, V.V. & Kehoe, P.J. & McGrattan, E., 2016. "Accounting for Business Cycles," Handbook of Macroeconomics, Elsevier.
    13. Eusepi, Stefano & Preston, Bruce, 2015. "Consumption heterogeneity, employment dynamics and macroeconomic co-movement," Journal of Monetary Economics, Elsevier, vol. 71(C), pages 13-32.
    14. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2013. "Risk Shocks," NBER Working Papers 18682, National Bureau of Economic Research, Inc.
    15. Sarte, Pierre-Daniel & Schwartzman, Felipe & Lubik, Thomas A., 2015. "What inventory behavior tells us about how business cycles have changed," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 264-283.
    16. 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.
    17. repec:spr:jbuscr:v:12:y:2016:i:2:d:10.1007_s41549-016-0007-0 is not listed on IDEAS

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