Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 282: Have Swedish Postwar Business Cycles Been Generated Abroad or at Home?

Jesper Lindé ()
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Jesper Lindé: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden

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.

JEL-codes: E17; E32; E62

36 pages, November 19, 1998

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