- 10 May 2017
- WORKING PAPER SERIES - No. 2058Details
- What are the drivers of business cycle fluctuations? And how many are there? By documenting strong and predictable co-movement of real variables during the business cycle in a sample of advanced economies, we argue that most business cycle ﬂuctuations are driven by one major factor. The positive co-movement of real output and inﬂation convincingly argues for a demand story. This feature—robust across time and space—provides a simple smell test for structural macroeconomic models. We propose a simple statistic that can compare data and models. Based on this statistic, we show that the recent vintage of structural economic models has difﬁculties replicating the stylized facts we document.
- JEL Code
- C10 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→General
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General