Investigating Cycle Anatomy
Angeletos et al. (2020) (ACD) identify a main shock among oscillations for 10 variables, including Total Factor Productivity (TFP). A striking conclusion is that the “main” shock has little effect on TFP, from which ACD call into question models that make TFP important for cycles. We show that this result is not robust to an alternative definition of the cycle. When we identify cycles with NBER turning point methods, and allow TFP shocks to be exogenous instead of endogenous as in ACD, they have an impact that tends to be larger than the “main” shock of ACD. TFP matters.
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