Evidence on a DSGE Business Cycle Model Subject to Neutral and Investment-Specific Technology Shocks Using Bayesian Model Averaging

CAMA Working Paper No. 3/2012

41 Pages Posted: 13 Feb 2012

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: February 2012

Abstract

The empirical support for a DSGE type of real business cycle model with two technology shocks is evaluated using a Bayesian model averaging procedure that 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 equilibrium restrictions and restrictions on long-run responses to technology shocks apart from having a range of lag structures and deterministic processes. These model features are weighted as posterior probabilites and computed using MCMC and analytical methods. Uncertainty exists as to the most appropriate model for our data, with five models receiving significant support. The model set used has substantial implications for the results obtained. We do find support for a number of features implied by the real business cycle model. Business cycle volatility seems more due to investment specific technology shocks than neutral technology shocks and this result is robust to model specification. These techonolgy schocks appear to account for all stochastic trends in our system after 1984. we provide evidence on the uncertainty bands associated with these results.

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

JEL Classification: C11, C32, C52

Suggested Citation

Strachan, Rodney W. and van Dijk, Herman K., Evidence on a DSGE Business Cycle Model Subject to Neutral and Investment-Specific Technology Shocks Using Bayesian Model Averaging (February 2012). CAMA Working Paper No. 3/2012, Available at SSRN: https://ssrn.com/abstract=2002372 or http://dx.doi.org/10.2139/ssrn.2002372

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
Burg. Oudlaan 50
Amsterdam/Rotterdam, 1082 MS
Netherlands
+31104088955 (Phone)
+31104089031 (Fax)

HOME PAGE: http://people.few.eur.nl/hkvandijk/

Econometric Institute ( email )

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