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Business cycle accounting

Chari, VV; Kehoe, PJ; McGrattan, ER; (2007) Business cycle accounting. Econometrica , 75 (3) pp. 781-836. 10.1111/j.1468-0262.2007.00768.x. Green open access

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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.

Type: Article
Title: Business cycle accounting
Open access status: An open access version is available from UCL Discovery
DOI: 10.1111/j.1468-0262.2007.00768.x
Publisher version: https://doi.org/10.1111/j.1468-0262.2007.00768.x
Language: English
Additional information: The copyright to this article is held by the Econometric Society, http://www.econometricsociety.org/. It may be downloaded, printed and reproduced only for personal or classroom use. Absolutely no downloading or copying may be done for, or on behalf of, any for-profit commercial firm or for other commercial purpose without the explicit permission of the Econometric Society. For this purpose, contact the Editorial Office of the Econometric Society ateconometrica@econometricsociety.org.
Keywords: Great Depression, sticky wages, sticky prices, financial frictions, pro-ductivity decline, capacity utilization, equivalence theorems.
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
URI: https://discovery.ucl.ac.uk/id/eprint/10054397
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