DP8364 Business cycle measurement with some theory

Author(s):	Fabio Canova, Matthias Paustian
Publication Date:	April 2011
Keyword(s):	misspecification, model validation, shock identification, sign restrictions
JEL(s):	C32, E32
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=8364

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.