The Role of Investment Wedges in the Carlstrom-Fuerst Economy and Business Cycle Accounting

Inaba, Masaru and Nutahara, Kengo (2008): The Role of Investment Wedges in the Carlstrom-Fuerst Economy and Business Cycle Accounting.

Abstract

Many researches that apply business cycle accounting (hereafter, BCA) to actual data conclude that models with investment frictions or investment wedges are not promising for modeling business cycle dynamics. In this paper, we apply BCA to artificial data generated by a variant model of Carlstrom and Fuerst (1997, American Economic Review), which is one of representative models with investment frictions. We find that BCA leads us to conclude that models of investment wedges are not promising according to the criteria of BCA, although the true model contains investment frictions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Business cycle accounting; investment wedge; investment friction; wedge decompsition
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C68 - Computable General Equilibrium Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E13 - Neoclassical

References

Carlstrom, C. T. and T. S. Fuerst, 1997, Agency costs, net worth, and business fluctuations: A computable general equilibrium analysis, American Economic Review 87, 893 - 910.

Chari, V. V., P. J. Kehoe, and E. R. McGrattan, 2002, Business cycle accounting, Research Department Working Paper 625, Federal Reserve Bank of Minneapolis.

Chari, V. V., P. J. Kehoe, and E. R. McGrattan, 2007, Business cycle accounting, Econometrica 75, 781 - 836.