Business cycle accounting for New Zealand

Abstract

ABSTRACTBusiness cycle accounting is performed to identify the kinds of macroeconomic models that best explain economic fluctuations in New Zealand. We estimate four wedges and then create counterfactuals to distinguish the wedges that are important in accounting for fluctuations. The labour wedge plays the main role in explaining output and hours worked, while the net export wedge remains largely irrelevant. An existing equivalence result relates different kinds of macroeconomic dynamic stochastic general equilibrium models to the different wedges. Models that incorporate foreign shocks in the standard manner are equivalent to the wedge relating to net exports. The implication is that while foreign shocks may be important in explaining New Zealand's economic fluctuations, macroeconomists need to move away from modelling them in ways that work via the net export wedge.