Postwar Business Cycles: What Are the Prime Drivers?

Abstract

This paper presents a structural model to account for a country's business cycle fluctuations. Our model is a two-sector open economy dynamic stochastic general equilibrium model in which production structure is classified by the intensity levels of primary energy (oil) use by firms in each sector. We estimate this model on unfiltered data by Indirect Inference, which is a simulation-based econometric approach. The results establish the fit of our model to the observed data. The estimated model is then scrutinized concerning the three epochs in US postwar economic activity, as we ask: Of the twenty-two structural shocks admitted into the model, which were the prime drivers of the Great Inflation, the Great Moderation, and the Great Recession?