Business Cycle Measurement with Some Theory

Abstract:     
A method to evaluate cyclical models which does not require knowledge of the DGP and the exact specification of the aggregate decision rules is proposed. We derive robust restrictions in a class of models; use some to identify structural shocks in the data and others to evaluate the class or contrast sub-models. The approach has good properties, even in small samples, and when the class of models is misspecified. We show how to sort out the relevance of a certain friction (the presence of rule-of-thumb consumers) in a standard class of models.

Number of Pages in PDF File: 44

Keywords: misspecification, model validation, shock identification, sign restrictions

JEL Classification: C32, E32

working papers series