Business cycle accounting: What have we learned so far?

Abstract

Abstract What drives recessions and expansions? Since it was introduced in 2007, there have been hundreds of business cycle accounting (BCA) exercises, a procedure aimed at identifying classes of models that hold quantitative promise to explain economic fluctuations. This paper contributes with a software—a graphical user interface that allows practitioners to perform BCA exercises with minimal effort—and exemplifies the procedure by studying the U.S. recessions in 1973 and 1990 and reflecting upon the critiques BCA has been subject to. We look into the many equivalence theorems that the literature has produced and that allow BCA practitioners to identify the theories that are quantitatively relevant for the economic period under study. The methodological extensions that have been brought forth since BCA's original inception are addressed as well as conclusions regarding the relative contribution of each wedge: GDP and investment are usually driven by an efficiency wedge, hours worked are closely related to the labor wedge and, in an open economy extension, the investment wedge helps to explain country risk spreads on international bonds. Finally, larger changes in interest rates and currency crises are usually associated with the investment and/or the labor wedge.

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