Correlated Disturbances and U.S. Business Cycles

Vasco Cúrdia
Authors registered in the RePEc Author Service: Vasco Cúrdia and Ricardo Reis

No 7712, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The dynamic stochastic general equilibrium (DSGE) models that are used to study business cycles typically assume that exogenous disturbances are independent autoregressions of order one. 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 make the estimation of DSGE models with correlated disturbances feasible and quick. Our second contribution is a re-examination 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.

Keywords: Bayesian estimation; Dsge; Robustness (search for similar items in EconPapers)
JEL-codes: E1 E3 (search for similar items in EconPapers)
Date: 2010-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Working Paper: Correlated disturbances and U.S. business cycles (2010)
Working Paper: Correlated Disturbances and U.S. Business Cycles (2010)
Working Paper: Correlated Disturbances and U.S. Business Cycles (2009)
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