We thank the co-editor and three referees for useful comments. We also thank Kathy Rolfe for excellent editorial assistance and the National Science Foundation for financial support. 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.
Business Cycle Accounting
Version of Record online: 20 APR 2007
Volume 75, Issue 3, pages 781–836, May 2007
How to Cite
Chari, V. V., Kehoe, P. J. and McGrattan, E. R. (2007), Business Cycle Accounting. Econometrica, 75: 781–836. doi: 10.1111/j.1468-0262.2007.00768.x
- Issue online: 20 APR 2007
- Version of Record online: 20 APR 2007
- Manuscript received September, 2004; final revision received December, 2006.
- Great Depression;
- sticky wages;
- sticky prices;
- financial frictions;
- productivity decline;
- capacity utilization;
- equivalence theorems
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 that resemble productivity, labor and investment taxes, and government consumption. Wedges that correspond to these variables—efficiency, labor, investment, and government consumption wedges—are measured and then fed back into the model so as 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 plays 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 U.S. business cycles.