Working Paper: CEPR ID: DP4750
Authors: Frank Smets; Rafael Wouters
Abstract: This Paper estimates a DSGE model with many types of shocks and frictions for both the US and the euro area economy over a common sample period (1974-2002). The structural estimation methodology allows us to investigate whether differences in business cycle behaviour are due to differences in the type of shocks that affect the two economies, differences in the propagation mechanism of those shocks or differences in the way the central bank responds to those economic developments. Our main conclusion is that each of those characteristics is remarkably similar across both currency areas.
Keywords: business cycle; fluctuations; DSGE models
JEL Codes: E10; E30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Demand shocks (E39) | Output developments (O21) |
| Monetary policy shocks (E39) | Output developments (O21) |
| Productivity shocks (O49) | Output developments (O21) |
| Labor supply shocks (J20) | Output developments (O21) |
| Nominal wage rigidity (J31) | Macroeconomic dynamics (E19) |
| Central bank responses (E58) | Short-term interest rates (E43) |
| Central bank responses (E58) | Persistence of interest rates (E43) |
| Structural differences (F12) | Sources of business cycle fluctuations (E32) |