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Comparing alternative representations and alternative methodologies in business cycle accounting

Varadarajan Chari, Patrick Kehoe and Ellen McGrattan

No 647, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: We make two comparisons relevant for the business cycle accounting approach. We show that in theory representing the investment wedge as a tax on investment is equivalent to representing this wedge as a tax on capital income as long as the probability distributions over this wedge in the two representations are the same. In practice, convenience dictates differing probability distributions over this wedge in the two representations. Even so, the quantitative results under the two representations are essentially identical. We also compare our methodology, the CKM methodology, to an alternative one used in Christiano and Davis (2006) as well as by us in early incarnations of the business cycle accounting approach. We argue that the CKM methodology rests on more secure theoretical foundations.> > Replaced by Staff Report No. 384

Keywords: Business; cycles; -; Econometric; models (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-acc, nep-dge and nep-mac
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