Working Paper: NBER ID: w10351
Authors: VV Chari; Patrick J. Kehoe; Ellen McGrattan
Abstract: We propose a simple method to help researchers develop quantitative models of economic fluctuations. The method rests on the insight that many models are equivalent to a prototype growth model with time-varying wedges which resemble productivity, labor and investment taxes, and government consumption. Wedges corresponding to these variables -- effciency, labor, investment, and government consumption wedges -- are measured and then fed back into the model in order to assess the fraction of various fluctuations they account for. Applying this method to U.S. data for the Great Depression and the 1982 recession reveals that the effciency and labor wedges together account for essentially all of the fluctuations; the investment wedge plays a decidedly tertiary role, and the government consumption wedge, none. Analyses of the entire postwar period and alternative model specifications support these results. Models with frictions manifested primarily as investment wedges are thus not promising for the study of business cycles.
Keywords: Business Cycle Accounting; Economic Fluctuations; Wedges; Great Depression; 1982 Recession
JEL Codes: E1; E12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| efficiency wedge (D61) | output fluctuations (E39) |
| labor wedge (J39) | output fluctuations (E39) |
| investment wedge (G31) | output fluctuations (E39) |
| government consumption wedge (H59) | output fluctuations (E39) |
| efficiency wedge (D61) | labor fluctuations (J89) |
| labor wedge (J39) | labor fluctuations (J89) |
| investment wedge (G31) | labor fluctuations (J89) |
| government consumption wedge (H59) | labor fluctuations (J89) |
| efficiency wedge (D61) | investment fluctuations (G31) |
| labor wedge (J39) | investment fluctuations (G31) |
| investment wedge (G31) | investment fluctuations (G31) |
| government consumption wedge (H59) | investment fluctuations (G31) |