About: Business cycle accounting

Business cycle accounting is an accounting procedure used in macroeconomics to decompose business cycle fluctuations into contributing factors. The procedure was introduced by V. V. Chari, , and Ellen McGrattan but is similar to techniques introduced earlier. The underlying premise of the procedure is that the economy has a long run trajectory which is perturbed by various frictions. These are called wedges and the earliest version of the procedure includes a productivity wedge, a labor wedge, an investment wedge and a government consumption wedge. Business cycle accounting decomposes fluctuations in macroeconomic variables, such as GDP or employment, into fluctuations of each of these wedges (and their combinations).