Accounting for Business Cycles

Abstract

We elaborate on the business cycle accounting method proposed by Chari, Kehoe, and McGrattan (2007), clear up some misconceptions about the method, and then apply it to compare the Great Recession across OECD countries as well as to the recessions of the 1980s in these countries. We have four main findings.

Identifying the sources of model misspecification

“…Finally, our paper is related to Chari et al (2007) and Brinca et al (2016), who introduce time-varying "wedges" to account for deviations between the time series of the observables implied by the model and those actually observed in the data. There is a fundamental difference and two more minor differences between our work and theirs.…”

Financial Frictions and Fluctuations in Volatility

“…Gilchrist, Sim, and Zakrajsek (2010) have a frictionless labor market and instead focus on the dynamics of investment. Di¤erently from us, they abstract from any feature that can generate the large observed labor wedge in the Great Recession documented by Brinca, Chari, Kehoe, and McGrattan (2016).…”

Evolution of Modern Business Cycle Models: Accounting for the Great Recession

“…This latter recession, instead, seems to suggest the need for a mechanism that makes labor fall much more relative to output than it does in both typical recessions and in standard models. (See Brinca et al 2016. ) As for the data, the two panels of Figure 2 illustrate this difference.…”

“…But if such shocks are the main drivers of the business cycle, then labor would be much more volatile than output, an implication that is inconsistent with US business cycles prior to the Great Recession. (See Chari, McGrattan 2007 andBrinca, Chari, Kehoe, andMcGrattan 2016. ) Finally, it is also important to understand how this time-varying aggregate productivity parameter should be interpreted.…”