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http://hdl.handle.net/10419/60751
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| Title: | | Correlated disturbances and US business cycles  |
| Authors: | | Cúrdia, Vasco Reis, Ricardo |
| Issue Date: | | 2010 |
| Series/Report no.: | | Staff Report, Federal Reserve Bank of New York 434 |
| Abstract: | | The dynamic stochastic general equilibrium (DSGE) models used to study business cycles typically assume that exogenous disturbances are independent first-order autoregressions. This paper relaxes this tight and arbitrary restriction by allowing for disturbances that have a rich contemporaneous and dynamic correlation structure. Our first contribution is a new Bayesian econometric method that uses conjugate conditionals to allow for feasible and quick estimation of DSGE models with correlated disturbances. Our second contribution is a reexamination of U.S. business cycles. We find that allowing for correlated disturbances resolves some conflicts between estimates from DSGE models and those from vector autoregressions and that a key missing ingredient in the models is countercyclical fiscal policy. According to our estimates, government spending and technology disturbances play a larger role in the business cycle than previously ascribed, while changes in markups are less important. |
| Subjects: | | DSGE Bayesian estimation robustness |
| JEL: | | E30 E10 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Staff Reports, Federal Reserve Bank of New York
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