TY  - JOUR
AU  - Christiano,Lawrence J.
AU  - Davis,Joshua M.
TI  - Two Flaws In Business Cycle Accounting
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12647
PY  - 2006
Y2  - October 2006
UR  - http://www.nber.org/papers/w12647
L1  - http://www.nber.org/papers/w12647.pdf
N1  - Author contact info:
Lawrence Christiano
Department of Economics
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/491-8231
Fax: 847/491-7001
E-Mail: l-christiano@northwestern.edu

Joshua M. Davis
Department of Economics
Northwestern University
Evanston, Illinois 60208
E-Mail: j-davis7@northwestern.edu
AB  - Using 'business cycle accounting' (BCA), Chari, Kehoe and McGrattan (2006) (CKM) conclude that models of financial frictions which create a wedge in the intertemporal Euler equation are not promising avenues for modeling business cycle dynamics. There are two reasons that this conclusion is not warranted. First, small changes in the implementation of BCA overturn CKM's conclusions. Second, one way that shocks to the intertemporal wedge impact on the economy is by their spillover effects onto other wedges. This potentially important mechanism for the transmission of intertemporal wedge shocks is not identified under BCA. CKM potentially understate the importance of these shocks by adopting the extreme position that spillover effects are zero.
ER  -