Business cycle accounting

Research output: Contribution to journalArticle

322 Scopus citations

Abstract

We propose a simple method to help researchers develop quantitative models of economic fluctuations. The method rests on the insight that many models are equivalent to a prototype growth model with time-varying wedges that resemble productivity, labor and investment taxes, and government consumption. Wedges that correspond to these variables - efficiency, labor, investment, and government consumption wedges - are measured and then fed back into the model so as to assess the fraction of various fluctuations they account for. Applying this method to U.S. data for the Great Depression and the 1982 recession reveals that the efficiency and labor wedges together account for essentially all of the fluctuations; the investment wedge plays a decidedly tertiary role, and the government consumption wedge plays none. Analyses of the entire postwar period and alternative model specifications support these results. Models with frictions manifested primarily as investment wedges are thus not promising for the study of U.S. business cycles.

Original languageEnglish (US)
Pages (from-to)781-836
Number of pages56
JournalEconometrica
Volume75
Issue number3
DOIs
StatePublished - May 1 2007

Keywords

  • Capacity utilization
  • Equivalence theorems
  • Financial frictions
  • Great depression
  • Productivity decline
  • Sticky prices
  • Sticky wages

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