Staff Report 531

Accounting for Business Cycles

Pedro Brinca
V. V. Chari | Consultant
Patrick J. Kehoe | Stanford University, University College London, Federal Reserve Bank of Minneapolis
Ellen R. McGrattan | Consultant

Revised September 6, 2016

We elaborate on the business cycle accounting method proposed by Chari, Kehoe, and McGrattan (2007), clear up some misconceptions about the method, and then apply it to compare the Great Recession across OECD countries as well as to the recessions of the 1980s in these countries. We have four main …findings. First, with the notable exception of the United States, Spain, Ireland, and Iceland, the Great Recession was driven primarily by the efficiency wedge. Second, in the Great Recession, the labor wedge plays a dominant role only in the United States, and the investment wedge plays a dominant role in Spain, Ireland, and Iceland. Third, in the recessions of the 1980s, the labor wedge played a dominant role only in France, the United Kingdom, Belgium, and New Zealand. Finally, overall in the Great Recession the efficiency wedge played a more important role and the investment wedge played a less important role than they did in the recessions of the 1980s.

Published In: Handbook of Macroeconomics (Volume 2, Chapter 13, 2016, pp. 1013-1063)

Download Paper (pdf)