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Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 625 Abstract:
This paper proposes a simple method for guiding researchers in developing quantitative models of economic fluctuations. We show that a large class of models, including models with various frictions, are equivalent to a prototype growth model with time-varying wedges that, at least at face value, look like time-varying productivity, labor taxes, and capital income taxes. We label the time-varying wedges as efficiency wedges, labor wedges, and investment wedges. We use data to measure these wedges and then feed them back into the prototype growth model. We then assess the fraction of fluctuations accounted for by these wedges during the great depressions of the 1930s in the United States, Germany, and Canada. We find that the efficiency and labor wedges in combination account for essentially all of the declines and subsequent recoveries. Investment wedges play, at best, a minor role.
Parola chiave: Financial frictions, Great Depression, Sticky wages, Productivity decline, Equivalence theorems, and Capacity utilization Soggetto: E12 - General Aggregative Models: Keynes; Keynesian; Post-Keynesian and E10 - General Aggregative Models: General
Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 328 Abstract:
We propose a simple method to help researchers develop quantitative models of economic fluctuations. The method rests on the insight that many models are equivalent to a prototype growth model with time-varying wedges which resemble productivity, labor and investment taxes, and government consumption. Wedges corresponding to these variables—efficiency, labor, investment, and government consumption wedges—are measured and then fed back into the model in order to assess the fraction of various fluctuations they account for. Applying this method to U.S. data for the Great Depression and the 1982 recession reveals that the efficiency and labor wedges together account for essentially all of the fluctuations; the investment wedge plays a decidedly tertiary role, and the government consumption wedge, none. Analyses of the entire postwar period and alternative model specifications support these results. Models with frictions manifested primarily as investment wedges are thus not promising for the study of business cycles. (See Additional Material for a response to Christiano and Davis (2006).)
Parola chiave: Capacity utilization, Sticky prices, Sticky wages, Equivalence theorems, Productivity decline, Financial frictions, and Great Depression Soggetto: E12 - General Aggregative Models: Keynes; Keynesian; Post-Keynesian and E10 - General Aggregative Models: General