Shocks and Frictions in U.S. Business Cycles: A Bayesian DSGE Approach

53 Pages Posted: 16 May 2008

See all articles by Frank Smets

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Rafael Wouters

National Bank of Belgium

Date Written: February 2007

Abstract

Using a Bayesian likelihood approach, we estimate a dynamic stochastic general equilibrium model for the US economy using seven macro-economic time series. The model incorporates many types of real and nominal frictions and seven types of structural shocks. We show that this model is able to compete with Bayesian Vector Autoregression models in out-of-sample prediction. We investigate the relative empirical importance of the various frictions. Finally, using the estimated model we address a number of key issues in business cycle analysis: What are the sources of business cycle fluctuations? Can the model explain the cross-correlation between output and inflation? What are the effects of productivity on hours worked? What are the sources of the "Great Moderation"?

Keywords: Business cycle, DSGE models, monetary policy

JEL Classification: E4, E5

Suggested Citation

Smets, Frank and Wouters, Rafael, Shocks and Frictions in U.S. Business Cycles: A Bayesian DSGE Approach (February 2007). CEPR Discussion Paper No. DP6112. Available at SSRN: https://ssrn.com/abstract=1133737

Frank Smets (Contact Author)

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+49 69 1344 6550 (Phone)
+49 69 1344 6575 (Fax)

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Rafael Wouters

National Bank of Belgium ( email )

Brussels, B-1000
Belgium
+32 2 221 5441 (Phone)
+32 2 221 3162 (Fax)

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