Shocks and Frictions in US Business Cycle: A Bayesian DSGE Approach

Mansur, Alfan (2020): Shocks and Frictions in US Business Cycle: A Bayesian DSGE Approach.

Abstract

This paper aims to replicate and extend Smets and Wouters (2007) who study the shocks and frictions in the US business cycle using a Bayesian DSGE methodology. The novelty of this research is by applying the extended Taylor rule for monetary policy in which the monetary policy also targets full employment. The SW model seems able to fit the US macroeconomic data very well. When the output gap in the Monetary policy Taylor rule is replaced with the unemployment rate, wage mark up shock becomes more persistent in determining inflation and interest rate. Productivity shock also becomes stronger in driving output. However, some unexpected results also come up, e.g. the negative responses of hours worked to a risk premium shock and inflation to the demand shocks

• Item Type: MPRA Paper
• Language: English
• Keywords: shocks, frictions, monetary policy
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

References

Christiano, L. J., M. Eichenbaum, and C. L. Evans (2005). Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113 (1), 1-45.

Dosi, G., G. Fagiolo, M. Napoletano, A. Roventini, and T. Treibich (2015). Fiscal and monetary policies in complex evolving economies. Journal of Economic Dynamics and Control 52, 166-189.

Pfeifer, J. (2016). Smets[underscore]wouters[underscore]2007.mod for dynare 4.5.

Smets, F., and R. Wouters (2003). An estimated dynamic stochastic general equilibrium model of the euro area. Journal of the European Economic Association 1 (5), 1123-1175.

Smets, F., and R. Wouters (2007). Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach. American Economic Review 97 (3), 586-606.