On Equivalence Results In Business Cycle Accounting

Business cycle accounting rests on the insight that the prototype neoclassical growth model with time-varying wedges can achieve the same allocation generated by a large class of frictional models: equivalence results. Equivalence results are shown under general conditions about the process of wedges while it is often specified to be the first order vector autoregressive when one applies business cycle accounting to actual data. In this paper, the authors characterize the class of models covered by the prototype model under the conventional first order vector autoregressive specification of wedges and find that it is much smaller than that believed in previous literature.