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Preliminary and incomplete SHOCKS AND FRICTIONS IN US BUSINESS CYCLES: A BAYESIAN DSGE APPROACH

By Frank Smets and Raf Wouters

Abstract

We estimate a dynamic stochastic general equilibrium (DSGE) model for the US economy. The model incorporates many types of real and nominal frictions: sticky nominal price and wage setting, habit formation in consumption, investment adjustment costs, variable capital utilisation and fixed costs in production. It also contains many types of shocks including productivity, labour supply, investment, preference, cost-push and monetary policy shocks. Using Bayesian estimation techniques, the relative importance of the various frictions and shocks in explaining the US business cycle are empirically investigated. We also show that this model is able to outperform standard VAR and BVAR models in out-of-sample prediction. Key words: DSGE models; monetary polic

Year: 2003
OAI identifier: oai:CiteSeerX.psu:10.1.1.198.5862
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