Business Cycles: Fact, Fallacy And Fantasy

by Sumru G Altug

Overview

This book provides an overview of the modern theory and empirics of business cycles. Written by one of the pioneering authors in this field, it examines the notion of a business cycle and discusses alternative approaches to modeling. Arguably, one of the most important debates in this literature has been the issue of “matching” a business cycle to the data. In their original contribution, Kydland and Prescott (1982) proposed the method of calibration as a way of examining the implications of a business cycle model; yet, even at its inception, this approach came under criticism from a variety of sources. This monograph will examine some of these criticisms and discuss alternative approaches that have been put forward. More generally, it will discuss what lies ahead for modern business cycle theory.

Product Details

ISBN-13:	9789812832764
Publisher:	World Scientific Publishing Company, Incorporated
Publication date:	12/11/2009
Pages:	160
Product dimensions:	6.20(w) x 9.00(h) x 0.80(d)

Table of Contents

Preface v

1 Introduction 1

2 Facts 7

2.1 Defining a Business Cycle 7

2.2 Stylized Facts 15

2.3 The Euro Area Business Cycle 19

2.4 Is There a World Business Cycle? 25

2.5 Historical Business Cycles 28

3 Models of Business Cycles 33

3.1 An RBC Model 34

3.2 A Numerical Solution 39

3.3 Initial Criticisms 46

3.4 "Puzzles" 48

3.4.1 A Model with Indivisible Labor Supply 49

3.4.2 The Productivity Puzzle 52

3.4.3 Reverse Causality 56

3.5 The Source of the Shocks 58

3.5.1 Investment-Specific Technological Shocks 59

3.5.2 Energy Shocks 63

4 International Business Cycles 65

4.1 Facts 65

4.2 The Role of International Risk Sharing 68

4.2.1 Pareto Optimal Allocations 69

4.2.2 Complete Contingent Claims 71

4.2.3 No Asset Trading 75

4.2.4 Nonspecialization in Endowments 77

4.2.5 Nontraded Goods 78

4.2.6 Trade in Equity Shares 79

4.2.7 Limited Risk Sharing 81

4.3 Other Extensions 87

4.4 Puzzles Revisited 90

5 New Keynesian Models 93

5.1 The Basic Model 94

5.2 Empirical Evidence 99

6 Business Cycles in Emerging Market Economies 101

6.1 A Small Open-Economy Model of Emerging Market Business Cycles 102

6.2 Do Shocks to Trend Productivity Explain Business Cycles in Emerging Market Economies? 106

7 Matching the Model to the Data 109

7.1 Dynamic Factor Analysis 110

7.1.1 Measures of Fit for Calibrated Models 113

7.1.2 Other Applications 116

7.2 GMM Estimation Approaches 117

7.3 The Calibration versus Estimation Debate 119

7.3.1 The Dynamics of Output 120

7.3.2 Calibration as Estimation 121

7.3.3 Nonlinearity in Macroeconomic Time Series 123

7.3.4 The Debate Reconsidered 127

7.4 DSGE Modeling 129

8 Future Areas for Research 137

Bibliography 139

Index 151