Econ 702 Exercise – The Neoclassical Model: GDP and Shocks

Consider the following model (from Garin, Lester and Sims):

Where

Do the following graphs of GDP, productivity shocks (ΔA) and unemployment benefits (Δθ) make sense in the context of the neoclassical model? That is, do the series in the bottom two graphs seem to explain the behavior in the series (e.g., recessions, booms) in the top graph?

Figure 1: Top panel – GDP in bn.Ch.2012$ SAAR. Middle panel: annualized quarter-on-quarter growth in total factor productivity adjusted for capacity utilization. Bottom panel: annualized quarter-on-quarter growth in real unemployment benefits. NBER defined peak-to-trough recession dates shaded gray. Source: BEA via FRED, SF Fed, NBER, and author’s calculations.