Technology Shocks and Aggregate Fluctuations in an Estimated Hybrid RBC Model

37 Pages Posted: 8 Apr 2009

See all articles by Jim Malley

Jim Malley

University of Glasgow - Department of Economics

Ulrich Woitek

University of Zurich

Multiple version iconThere are 2 versions of this paper

Date Written: April 5, 2009

Abstract

This paper contributes to the on-going empirical debate regarding the role of the RBC model and in particular of technology shocks in explaining aggregate fluctuations. To this end we estimate the model's posterior density using Markov-Chain Monte-Carlo (MCMC) methods. Within this framework we extend Ireland's (2001, 2004) hybrid estimation approach to allow for a vector autoregressive moving average (VARMA) process to describe the movements and co-movements of the model's errors not explained by the basic RBC model. The results of marginal likelihood ratio tests reveal that the more general model of the errors significantly improves the model's fit relative to the VAR and AR alternatives. Moreover, despite setting the RBC model a more difficult task under the VARMA specification, our analysis, based on forecast error and spectral decompositions, suggests that the RBC model is still capable of explaining a significant fraction of the observed variation in macroeconomic aggregates in the post-war U.S. economy.

Keywords: Real Business Cycle, Bayesian estimation, VARMA errors

JEL Classification: C11, C52, E32

Suggested Citation

Malley, Jim and Woitek, Ulrich, Technology Shocks and Aggregate Fluctuations in an Estimated Hybrid RBC Model (April 5, 2009). Available at SSRN: https://ssrn.com/abstract=1374309 or http://dx.doi.org/10.2139/ssrn.1374309

Jim Malley (Contact Author)

University of Glasgow - Department of Economics ( email )

Adam Smith Building
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United Kingdom
+44 141 330 4617 (Phone)
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HOME PAGE: http://www.gla.ac.uk/economics/malley/

Ulrich Woitek

University of Zurich ( email )

Zürichbergstrasse 14
CH-8032 Zurich
Switzerland

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