It is often assumed that wedges evolve according to VAR(1) in the applications of business cycle accounting (BCA). However, recent research finds that the wedges have no VAR(1) representation in many dynamic stochastic general equilibrium (DSGE) economies, and that there might be a...

We apply business cycle accounting (BCA) to data generated by a representative model with investment wedges. Based on our findings, the criteria of BCA lead us to conclude that models with investment wedges are not promising for modeling business cycles.

An internal habit can be a source of news-driven business cycles, positive comovements in consumption, labor, investment, and output from the news about the future, whereas an external habit cannot.