Evidence on a Real Business Cycle Model with Neutral and Investment-Specific Technology Shocks Using Bayesian Model Averaging

Tinbergen Institute Discussion Paper 10-050/4

54 Pages Posted: 31 May 2010

See all articles by Rodney W. Strachan

Rodney W. Strachan

University of Queensland - School of Economics

H. K. van Dijk

Tinbergen Institute; Econometric Institute

Date Written: May 17, 2010

Abstract

The empirical support for a real business cycle model with two technology shocks is evaluated using a Bayesian model averaging procedure. This procedure makes use of a finite mixture of many models within the class of vector autoregressive (VAR) processes. The linear VAR model is extended to permit cointegration, a range of deterministic processes, equilibrium restrictions and restrictions on long-run responses to technology shocks. We find support for a number of the features implied by the real business cycle model. For example, restricting long run responses to identify technology shocks has reasonable support and important implications for the short run responses to these shocks. Further, there is evidence that savings and investment ratios form stable relationships, but technology shocks do not account for all stochastic trends in our system. There is uncertainty as to the most appropriate model for our data, with thirteen models receiving similar support, and the model or model set used has signficant implications for the results obtained.

Keywords: Posterior probability, Real business cycle model, Cointegration, Model averaging, Stochastic trend, Impulse response, Vector autoregressive model

JEL Classification: C11, C32, C52

Suggested Citation

Strachan, Rodney W. and van Dijk, Herman K., Evidence on a Real Business Cycle Model with Neutral and Investment-Specific Technology Shocks Using Bayesian Model Averaging (May 17, 2010). Tinbergen Institute Discussion Paper 10-050/4, Available at SSRN: https://ssrn.com/abstract=1615990 or http://dx.doi.org/10.2139/ssrn.1615990

Rodney W. Strachan (Contact Author)

University of Queensland - School of Economics ( email )

Brisbane, QLD 4072
Australia

Herman K. Van Dijk

Tinbergen Institute ( email )

Gustav Mahlerplein 117
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Netherlands
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Econometric Institute ( email )

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