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Dynamic properties of the New-Neoclassical Synthesis model of business cycle

By Frédéric Dufourt


Linear and Hodrick-Prescott detrending methods do not provide a good approximation of the business cycle when output contains a unit root. I use the multivariate Beveridge-Nelson decomposition to document the main patterns of US postwar business cycle when output and some other variables are assumed to be integrated I(1) processes. I show that the business cycle identi…ed in this way displays some important di¤erences with those obtained from the preceding methods. I then evaluate the ability of various dynamic general equilibrium (DGE) models to replicate the main aspects of this business cycle. Among competing models, I …nd that the best speci…cation involves an economy hit simultaneously by both technological and monetary shocks, in a context of price stickiness and limited (but not su¢cient) accommodation by the monetary authorities. Hence, the data favor the model advocated by the New-Neoclassical Synthesis rather than its purely classical (RBC type) or purely Keynesian counterparts

Topics: Business cycles, Price rigidities, Beveridge-Nelson decomposition
Year: 1999
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