SSE/EFI Working Paper Series in Economics and Finance
Have Swedish Postwar Business Cycles Been Generated Abroad or at Home?
Abstract: This paper investigates the relative importance of foreign
and domestic shocks for the Swedish postwar business cycle in a
neoclassical stochastic growth model of a small open economy. We extend
previous work in the literature by allowing for stochastic fiscal policy,
since recent research has shown that fiscal policy shocks may be important
for business cycles. It is found that the introduction of fiscal policy
improves the empirical fit of the model, but not significantly so. Foreign
and domestic shocks are shown to be approximately equally important for
fluctuations in output, while foreign shocks are farmost important for
fluctuations in the real exchange rate and the current account. Among the
domestic shocks, innovations in fiscal policy are found to be of relatively
low importance for business cycles.
Keywords: Real Business Cycle model; small open economy; Simulated Method of Moments; variance decomposition.; (follow links to similar papers)
JEL-Codes: E17; E32; E62; (follow links to similar papers)
36 pages, November 19, 1998
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