DP7201 What?s News in Business Cycles

Author(s): Stephanie Schmitt-Grohé, Martín Uribe
Publication Date: March 2009
Keyword(s): anticipated shocks, Bayesian estimation, sources of aggregate fluctuations
JEL(s): C11, C51, E13, E32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7201

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.