Shocks and Frictions in US Business Cycle: A Bayesian DSGE Approach

This paper aims to replicate and extend Smets and Wouters (2007) who study the shocks and frictions in the US business cycle using a Bayesian DSGE methodology. The novelty of this research is by applying the extended Taylor rule for monetary policy in which the monetary policy also targets full employment. The SW model seems able to fit the US macroeconomic data very well. When the output gap in the Monetary policy Taylor rule is replaced with the unemployment rate, wage mark up shock becomes more persistent in determining inflation and interest rate. Productivity shock also becomes stronger in driving output. However, some unexpected results also come up, e.g. the negative responses of hours worked to a risk premium shock and inflation to the demand shocks