Business Cycle Measurement with Some Theory
Universitat Pompeu Fabra - Department of Economics and Business (DEB); University of Southampton - Division of Economics; Centre for Economic Policy Research (CEPR)
Bank of England
CEPR Discussion Paper No. DP8364
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, E32working papers series
Date posted: May 4, 2011
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