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Business Cycle Accounting: what have we learned so far?

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  • Brinca, Pedro
  • Costa-Filho, João
  • Loria, Francesca

Abstract

What drives recessions and expansions? Since it was introduced in 2007, there have been hundreds of business cycle accounting (BCA) exercises, a procedure aimed at identifying classes of models that hold quantitative promise to explain a certain period of economic fluctuations. First, we exemplify the procedure by studying the U.S. recessions in 1973 and 1990 using and reflect upon the critiques BCA has been subject to. Second, we look into the many equivalence theorems that the literature has produced and that allow BCA practitioners to identify the theories that are quantitatively relevant for the economic period under study. Third, we describe the methodological extensions that have been brought forth since BCA’s original inception. We end by providing some broad conclusions regarding the relative contribution of each wedge: GDP and aggregate investment are usually driven by an efficiency wedge, hours of work are closely related to the labor wedge and, in an open economy, the investment wedge helps to explain country risk spreads on international bonds. Larger changes in interest rates and currency crises are usually associated with the investment and/or the labor wedge. Finally, we contribute with a graphical user interface that allows practitioners to perform business cycle accounting exercises with minimal effort.

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  • Brinca, Pedro & Costa-Filho, João & Loria, Francesca, 2020. "Business Cycle Accounting: what have we learned so far?," MPRA Paper 100180, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:100180
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    Keywords

    Business Cycle Accounting; business cycles; wedges;

    JEL classification:

    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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