Wednesday, September 26, 2012

10 October 2012: Shocks – What do SVAR Models Tell us About the Postwar Business Cycle?

David Kim
University of Sydney

Which shock is the most dominant driver of the postwar business cycle fluctuations? Does SVAR-based evidence justify discarding the technology shock driven real business cycle (RBC) hypothesis, as in Gali (1999), Francis and Ramey (2005), and Gali and Rabanal (2004)? To further investigate the plausibility of technology shocks as a driving force of US business cycle fluctuations, we re-visit some of the most commonly understood structural vector autoregressive (SVAR) models. They are the SVAR models of Cochrane (1994a), Gali (1999), Shapiro and Watson (1988) and King, Plosser, Stock and Watson (1991). Across all versions of these models, technology shocks are as important in explaining economic fluctuations as aggregate demand shocks combined. We also show that technology shocks retain sizable conditional correlations with output in the postwar US data. Our SVAR evidence suggests that the technology shock driven models should not be discarded as a positive theory of the business cycle. Recent theoretical advances with investment specific technology or varying factor shares may help justify the empirical importance of technology shocks.

Date: October 10, 2012
Time: 03:O0 P.M.

ICRIER Conference Room,
Core 6A, 4th Floor,
India Habitat Centre, Lodi Road,
New Delhi – 110 003(INDIA)


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