Correlated Disturbances and U.S. Business Cycles

47 Pages Posted: 3 Mar 2010

See all articles by Vasco Cúrdia

Vasco Cúrdia

Federal Reserve Bank of San Francisco

Ricardo Reis

London School of Economics & Political Science (LSE); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2010

Abstract

The dynamic stochastic general equilibrium (DSGE) models used to study business cycles typically assume that exogenous disturbances are independent first-order autoregressions. This paper relaxes this tight and arbitrary restriction by allowing for disturbances that have a rich contemporaneous and dynamic correlation structure. Our first contribution is a new Bayesian econometric method that uses conjugate conditionals to allow for feasible and quick estimation of DSGE models with correlated disturbances. Our second contribution is a reexamination of U.S. business cycles. We find that allowing for correlated disturbances resolves some conflicts between estimates from DSGE models and those from vector autoregressions and that a key missing ingredient in the models is countercyclical fiscal policy. According to our estimates, government spending and technology disturbances play a larger role in the business cycle than previously ascribed, while changes in markups are less important.

Keywords: DSGE, Bayesian estimation, robustness

JEL Classification: E30, E10

Suggested Citation

Cúrdia, Vasco and Reis, Ricardo A.M.R., Correlated Disturbances and U.S. Business Cycles (February 2010). FRB of New York Staff Report No. 434. Available at SSRN: https://ssrn.com/abstract=1561771 or http://dx.doi.org/10.2139/ssrn.1561771

Vasco Cúrdia (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
MS 1130
San Francisco, CA 94105
United States
(415) 977-3624 (Phone)

HOME PAGE: http://www.frbsf.org/economics/economists/staff.php?vcurdia

Ricardo A.M.R. Reis

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
21
Abstract Views
480
PlumX Metrics