Two Flaws In Business Cycle Accounting / Lawrence J. Christiano, Joshua M. Davis.

Format:

Book

Author/Creator:

Christiano, Lawrence J.

Contributor:

National Bureau of Economic Research.

Davis, Joshua M.

Series:

Working Paper Series (National Bureau of Economic Research) no. w12647.

NBER working paper series no. w12647

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2006.

Summary:

Using 'business cycle accounting' (BCA), Chari, Kehoe and McGrattan (2006) (CKM) conclude that models of financial frictions which create a wedge in the intertemporal Euler equation are not promising avenues for modeling business cycle dynamics. There are two reasons that this conclusion is not warranted. First, small changes in the implementation of BCA overturn CKM's conclusions. Second, one way that shocks to the intertemporal wedge impact on the economy is by their spillover effects onto other wedges. This potentially important mechanism for the transmission of intertemporal wedge shocks is not identified under BCA. CKM potentially understate the importance of these shocks by adopting the extreme position that spillover effects are zero.

Notes:

Print version record

October 2006.