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Assesssing the Implications of Financial/Real Interactions for Business Cycles in Macroeconometric Models

Many macroeconometric models are built to understand business cycles and (possibly) to predict recessions. But the methods applied to assess them are rarely of the form that one learns either whether they provide a good explanation of cycle characteristics or whether they can predict recessions. In this paper we review and apply techniques that do this. We apply the methods to two models which typify common approaches to including financial/real interactions -- Gilchrist, Ortiz & Zakrajsek (2009) and Iacoviello & Neri (2010) -- and find that the introduction of financial features into these models does not modify cycles to the extent that the empirical literature, such as IMF (2009), would suggest is needed.