Journal Article

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

Smets, Frank, Wouters, Rafael

2007

Overview

Using a Bayesian likelihood approach, we estimate a dynamic stochastic general equilibrium model for the US economy using seven macroeconomic time series. The model incorporates many types of real and nominal frictions and seven types of structural shocks. We show that this model is able to compete with Bayesian Vector Autoregression models in out-of-sample prediction. We investigate the relative empirical importance of the various frictions. Finally, using the estimated model, we address a number of key issues in business cycle analysis: What are the sources of business cycle fluctuations? Can the model explain the cross correlation between output and inflation? What are the effects of productivity on hours worked? What are the sources of the \"Great Moderation\"?

• Publisher: American Economic Association
• Subject: Bayesian analysis / Bayesian method / Business cycle transmissions / Business cycles / Capital investments / Central banks / Consumption / Costs / Demand shocks / Dynamic models / Economic fluctuations / Economic models / Equilibrium / Estimation / Forecasting models / Inflation / Inflation rates / Inflation shocks / Labor market / Labor supply / Macroeconomics / Modeling / Moderation / Monetary policy / National banks / Output rate / Prediction models / Price shocks / Productivity / Regression analysis / Risk premiums / Stochastic models / Studies / Time series / U.S.A / Utility functions / Vector-autoregressive models / Wages & salaries / Working hours