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Title: What?s News in Business Cycles

Author(s): Stephanie Schmitt-Grohé and Martín Uribe

Publication Date: March 2009

Keyword(s): anticipated shocks, Bayesian estimation and sources of aggregate fluctuations

Programme Area(s): International Macroeconomics

Abstract: In this paper, we perform a structural Bayesian estimation of the contribution of anticipated shocks to business cycles in the postwar United States. Our theoretical framework is a real-business-cycle model augmented with four real rigidities: investment adjustment costs, variable capacity utilization, habit formation in consumption, and habit formation in leisure. Business cycles are assumed to be driven by permanent and stationary neutral productivity shocks, permanent investment-specific shocks, and government spending shocks. Each of these driving forces is buffeted by four types of structural innovations: unanticipated innovations and innovations anticipated one, two, and three quarters in advance. We find that anticipated shocks account for more than two thirds of predicted aggregate fluctuations.

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Bibliographic Reference

Schmitt-Grohé, S and Uribe, M. 2009. 'What?s News in Business Cycles'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7201