An Application of Business Cycle Accounting with Misspecified Wedges

Author Name NUTAHARA Kengo  (Department of Economics, Senshu University) /INABA Masaru  (The Canon Institute for Global Studies)
Creation Date/NO. February 2011 11-E-005
Research Project Building a New Macroeconomic Model and Policies in Times of Economic Crisis
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It is often assumed that wedges evolve according to the VAR (1) in the applications of business cycle accounting (BCA). However, recent research finds that the wedges have no VAR (1) representation in many dynamic stochastic general equilibrium(DSGE) economies, and that there might be a misspecification of the stochastic process of wedges. In order to assess the empirical usefulness of BCA, we apply BCA to a widely used medium-scale DSGE economy. Based on our experiments, we find that the accuracy of the measurement of wedges is high enough to capture the business cycle implications of wedges.