Paper #1203

Title:

Business cycle measurement with some theory

Authors:

Fabio Canova and Matthias Paustian

Date:

November 2007 (Revised: July 2011)

Abstract:

A method to evaluate cyclical models not requiring 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. The method is used to sort out the relevance of a certain friction (the presence of rule-of-thumb consumers) in a standard class of models.

Keywords:

Sign restrictions, shock identification, model validation, misspecification.

JEL codes:

E32, C32

Area of Research:

Macroeconomics and International Economics

Published in:

Journal of Monetary Economics, 58 (4), 345-361, 2011

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