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The Dynamic Stochastic General Equilibrium (DSGE) models that are used to study business cycles typically assume that exogenous disturbances are independent auto regressions of order one. This paper relaxes this tight and arbitrary restriction, by allowing for disturbances that have a rich contemporaneous and dynamic correlation structure. The first contribution is a new Bayesian econometric method that uses conjugate conditionals to make the estimation of DSGE models with correlated disturbances feasible and quick. The second contribution is a re-examination of U.S. business cycles.
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