On the sources of business cycles: implications for DSGE models
Jan Bruha () and
No 2058, Working Paper Series from European Central Bank
What are the drivers of business cycle fluctuations? And how many are there? By documenting strong and predictable co-movement of real variables during the business cycle in a sample of advanced economies, we argue that most business cycle ﬂuctuations are driven by one major factor. The positive co-movement of real output and inﬂation convincingly argues for a demand story. This feature—robust across time and space—provides a simple smell test for structural macroeconomic models. We propose a simple statistic that can compare data and models. Based on this statistic, we show that the recent vintage of structural economic models has difﬁculties replicating the stylized facts we document. JEL Classification: C10, E32, E50
Keywords: business cycle; demand shocks; DSGE models; dynamic principal component analysis (search for similar items in EconPapers)
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Working Paper: On the Sources of Business Cycles: Implications for DSGE Models (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20172058
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