TY  - JOUR
AU  - Cúrdia,Vasco
AU  - Reis,Ricardo
TI  - Correlated Disturbances and U.S. Business Cycles
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15774
PY  - 2010
Y2  - February 2010
UR  - http://www.nber.org/papers/w15774
L1  - http://www.nber.org/papers/w15774.pdf
N1  - Author contact info:
Vasco Curdia
Federal Reserve Bank of New York
33 Liberty Street, 3rd Floor
New York, NY 10045
Tel: 2127205994
E-Mail: vcurdia@gmail.com

Ricardo Reis
Department of Economics, MC 3308
Columbia University
420 West 118th Street, Rm. 1022 IAB
New York  NY  10027
Tel: 212-851-4007
Fax: 212-854-8059
E-Mail: rreis@columbia.edu
AB  - The dynamic stochastic general equilibrium (DSGE) models that are used to study business cycles typically assume that exogenous disturbances are independent autoregressions of order one.  This paper relaxes this tight and arbitrary restriction, by allowing for disturbances that have a rich contemporaneous and dynamic correlation structure.  Our first contribution is a new Bayesian econometric method that uses conjugate conditionals and Gibbs sampling to make the estimation of DSGE models with correlated disturbances feasible.  This provides a useful check for model misspecification in the search for models with structural disturbances.  Our second contribution is a re-examination of U.S. business cycles.  We find that allowing for correlated disturbances resolves some conflicts between estimates from DSGE models and those from vector autoregressions, and that treating government spending as exogenous in spite of its clear countercyclicality in the data is the main source of misspecification.  According to our estimates, government spending and technology disturbances play a larger role in the business cycle than previously ascribed, while changes in markups are less important.
ER  -