This presentation is part of: E30-1 (1886) Prices, Business Fluctuations, and Cycles
Letting Different Views about Business Cycles Compete
Paul Beaudry, Ph.D., Economics, UBC Vancouver, 997 - 1873 EAST MALL, Vancouver, BC V6T 1Z1, Canada and Bernd Lucke, Dr., Economics, University of Hamburg, von-Melle-Park 5, Hamburg, D-20146, Germany.
There are several candidate explanations for macro-fluctuations. Two of the most common discussed sources are surprise changes in disembodied technology and monetary innovations. Another popular explanation is found under the heading of a preference (or more generally: demand) shock, which may represent for example a change in the preferences for goods today versus tomorrow. More recently two other explanations have been advocated: surprise changes in investment specific technology and news about future technology growth. The aim of this paper is to provide a quantitative assessment of the relative merits of all these explanations by adopting a framework which allows them to compete. In particular, we propose a co-integrated SVAR approach that encompasses all 5 shocks and thereby offers a coherent evaluation of the dynamics they induce as well as their contribution to macro volatility. Our main finding is that surprise changes in technology, whether it be of the disembodied or embodied nature, account for very little of fluctuations. In contrast, expected changes in technology appear to be the main force, with preference/demand shocks and monetary shocks also playing non-negligible roles.