Discussion Paper Details

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Title: Business cycle measurement with some theory

Author(s): Fabio Canova and Matthias Paustian

Publication Date: April 2011

Keyword(s): misspecification, model validation, shock identification and sign restrictions

Programme Area(s): International Macroeconomics

Abstract: A method to evaluate cyclical models which does not require knowledge of the DGP and the exact specification of the aggregate decision rules is proposed. We derive robust restrictions in a class of models; use some to identify structural shocks in the data and others to evaluate the class or contrast sub-models. The approach has good properties, even in small samples, and when the class of models is misspecified. We show how to sort out the relevance of a certain friction (the presence of rule-of-thumb consumers) in a standard class of models.

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Bibliographic Reference

Canova, F and Paustian, M. 2011. 'Business cycle measurement with some theory'. London, Centre for Economic Policy Research.