Two flaws in business cycle dating

Lawrence Christiano and Joshua M. Davis

No 612, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: Using ?business cycle accounting,? Chari, Kehoe, and McGrattan (2006) conclude that models of financial frictions which create a wedge in the intertemporal Euler equation are not promising avenues for modeling business cycle dynamics. There are two reasons that this conclusion is not warranted. First, small changes in the implementation of business cycle accounting overturn Chari, Kehoe, and McGrattan?s conclusions. Second, one way that shocks to the intertemporal wedge affect the economy is by their spillover effects onto other wedges. This potentially important mechanism for the transmission of intertemporal-wedge shocks is not identified under business cycle accounting. Chari, Kehoe, and McGrattan potentially understate the importance of these shocks by adopting the extreme position that spillover effects are zero.

Keywords: Business; cycles (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge and nep-mac
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DOI: 10.26509/frbc-wp-200612

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