Abstract

http://ssrn.com/abstract=1022188
 
 

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Two Flaws in Business Cycle Dating


Lawrence J. Christiano


Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Joshua Mark Davis


Pacific Investment Management Company (PIMCO); Northwestern University - Department of Economics

October 2006

FRB of Cleveland Working Paper No. 06-12

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.

Number of Pages in PDF File: 62

Keywords: business cycle accounting, financial frictions, intertemporal wedge, spillover effects

JEL Classification: E32, E33

working papers series





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Date posted: October 19, 2007  

Suggested Citation

Christiano, Lawrence J. and Davis, Joshua Mark, Two Flaws in Business Cycle Dating (October 2006). FRB of Cleveland Working Paper No. 06-12. Available at SSRN: http://ssrn.com/abstract=1022188 or http://dx.doi.org/10.2139/ssrn.1022188

Contact Information

Lawrence J. Christiano (Contact Author)
Northwestern University ( email )
2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8231 (Phone)
847-491-7001 (Fax)
Federal Reserve Bank of Cleveland
East 6th & Superior
Cleveland, OH 44101-1387
United States
Federal Reserve Bank of Chicago
230 South LaSalle Street
Chicago, IL 60604
United States
Federal Reserve Bank of Minneapolis
90 Hennepin Avenue
Minneapolis, MN 55480
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Joshua Mark Davis
Pacific Investment Management Company (PIMCO) ( email )
840 Newport Center Drive
Suite 100
Newport Beach, CA 92660
United States
Northwestern University - Department of Economics ( email )
2003 Sheridan Road
Evanston, IL 60208
United States
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