Elsevier

Handbook of Macroeconomics

Volume 2, 2016, Pages 1013-1063
Handbook of Macroeconomics

Chapter 13 - Accounting for Business Cycles

https://doi.org/10.1016/bs.hesmac.2016.05.002Get rights and content

Abstract

We elaborate on the business cycle accounting method proposed by Chari et al. (2006), clear up some misconceptions about the method, and then apply it to compare the Great Recession across OECD countries as well as to the recessions of the 1980s in these countries. We have four main findings. First, with the notable exception of the United States, Spain, Ireland, and Iceland, the Great Recession was driven primarily by the efficiency wedge. Second, in the Great Recession, the labor wedge plays a dominant role only in the United States, and the investment wedge plays a dominant role in Spain, Ireland, and Iceland. Third, in the recessions of the 1980s, the labor wedge played a dominant role only in France, the United Kingdom, and Belgium. Finally, overall in the Great Recession, the efficiency wedge played a more important role and the investment wedge played a less important role than they did in the recessions of the 1980s.

Section snippets

Demonstrating the Equivalence Result

Here, we show how various detailed models with underlying distortions are equivalent to a prototype growth model with one or more wedges.

The Accounting Procedure

Having established our equivalence result, we now describe our accounting procedure at a conceptual level, discuss a Markovian implementation of it, and distinguish our procedure from others.

Our procedure is designed to answer questions of the following kind: How much would output fluctuate if the only wedge that fluctuated is the efficiency wedge and the probability distribution of the efficiency wedge is the same as in the prototype economy? Critically, our procedure ensures that agents’

Applying the Accounting Procedure

Now we demonstrate how to apply our accounting procedure to the Great Recession and postwar data for the United States and a group of other OECD countries. (In Appendix, we describe in detail our data sources, parameter choices, computational methods, and estimation procedures.)

Conclusion

We have elaborated on the business cycle accounting method proposed by CKM, cleared up some misconceptions about the method, and applied it to compare the Great Recession across OECD countries as well as to the recessions of the 1980s in these countries.

We documented four findings. First, with the notable exception of the United States, Spain, Ireland, and Iceland, the Great Recession was driven primarily by the efficiency wedge. Second, in the Great Recession, the labor wedge plays a dominant

Acknowledgments

We thank Peter Klenow for useful comments and Francesca Loria for excellent research assistance. V.V.C. and P.J.K. thank the National Science Foundation for financial support. P.B. is grateful for financial support from the Portuguese Science and Technology Foundation, grants number SFRH/BPD/99758/2014, UID/ECO/00124/2013, and UID/ECO/04105/2013. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

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