Trends and Cycles: An Historical Review of the Euro Area

45 Pages Posted: 27 Jun 2010

Date Written: November 1, 2009

Abstract

We analyze the euro area business cycle in a medium scale DSGE model where we assume two stochastic trends: one on total factor productivity and one on the inflation target of the central bank. To justify our choice of integrated trends, we test alternative specifications for both of them. We do so, estimating trends together with the model's structural parameters, to prevent estimation biases. In our estimates, business cycle fluctuations are dominated by investment specific shocks and preference shocks of households. Our results cast doubts on the view that cost push shocks dominate economic fluctuations in DSGE models and show that productivity shocks drive fluctuations on a longer term.

As a conclusion, we present our estimation's historical reading of the business cycle in the euro area. This estimation gives credible explanations of major economic events since 1985.

Keywords: New Keynesian model, Business Cycle, Bayesian estimation

JEL Classification: E32

Suggested Citation

Barthelemy, Jean and Marx, Magali and Poissonnier, Aurelien, Trends and Cycles: An Historical Review of the Euro Area (November 1, 2009). Banque de France Working Paper No. 258, Available at SSRN: https://ssrn.com/abstract=1630255 or http://dx.doi.org/10.2139/ssrn.1630255

Jean Barthelemy (Contact Author)

Banque de France ( email )

Paris
France

Magali Marx

Banque de France ( email )

Paris
France

Aurelien Poissonnier

Banque de France ( email )

Paris
France

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