Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. production. The stochastic dynamics is driven by seven orthogonal structural shocks: total factor productivity shocks, risk premium shocks, investment-specific technology shocks, wage mark-up shocks, price mark-up shocks, exogenous spending shocks and monetary policy shocks. Terms of use: Documents in EconStor mayThe objectives of the paper are threefold. First, as the NNS models have become the standard workhorse for monetary policy analysis, it is important to verify whether they can explain the main features of the US macro data: real GDP, hours worked, consumption, investment, real wages, prices and the short-term nominal interest rate. We show that the NNS model has a fit comparable to that of Bayesian VAR models. These results are confirmed by a simple out-of-sample forecasting exercise. The restrictions implied by the NNS model lead to an improvement of the forecasting performance compared to standard VARs, in particular, at medium-term horizons. Bayesian NNS models therefore combine a sound, microfounded structure suitable for policy analysis with a good probabilistic description of the observed data and good forecasting performance.Second, the introduction of a large number of frictions raises the question whether each of those frictions are really necessary to describe the seven data series. The Bayesian estimation methodology provides a natural framework for testing which frictions are empirically important by comparing the marginal ECB Working Paper Series No 722February 2007 important are the investment adjustment costs. In the presence of wage stickiness, the introduction of variable capacity utilisation is less important.Finally, we use the estimated NNS model to address a number of key business cycle issues. First, what are the main driving forces of output developments in the US? We find that "demand" shocks such as the risk premium, exogenous spending and investment-specific technology shocks explain a significant fraction of the short-run forecast variance in output. However, wage mark-up (or labour supply) and to a lesser extent productivity shocks explain most of its variation in the medium to long run. Second, do positive productivity shocks increase or reduce employment. We find that they have a significant shortrun negative impact on hours worked. This is the case even in the economy with flexible prices and wages because of the slow adjustment of the two demand components following a positive productivity shock.Third, inflation de...

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