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Real Business Cycle Models

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Author Info
Bennett T. McCallum

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Abstract

This paper attempts to provide an evaluation of both strengths and weaknesses of the real business cycle (RBC) approach to the analysis of macroeconomic fluctuations. It begins with a description of the basic analytical structure typically employed, one in which individual households make consumption and labor supply decisions while producing output from capital and labor inputs, hired on competitive markets, according to a technology that is subject to stochastic shocks. It then explores conditions on parameter values that are needed for a model of this type to yield fluctuations that provide a good quantitative match to those observed in the postwar U.S. quarterly data. The plausibility of the hypothesis that (unobservable) aggregate technology shocks have the requisite variability is considered and problems with certain cross correlations are noted. Relevant evidence obtained by formal econometric methods is summarized and a few tentative conclusions regarding business cycle research are suggested.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2480.

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Date of creation: May 1990
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Handle: RePEc:nbr:nberwo:2480

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References listed on IDEAS
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  1. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22. [Downloadable!]
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  2. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-81, September. [Downloadable!] (restricted)
  3. Donaldson, John B. & Mehra, Rajnish, 1983. "Stochastic growth with correlated production shocks," Journal of Economic Theory, Elsevier, vol. 29(2), pages 282-312, April. [Downloadable!] (restricted)
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  5. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November. [Downloadable!] (restricted)
  6. Kydland, Finn E., 1984. "Labor-force heterogeneity and the business cycle," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 173-208, January. [Downloadable!] (restricted)
  7. Davis, Steven J., 1987. "Fluctuations in the pace of labor reallocation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 335-402, January. [Downloadable!] (restricted)
  8. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April. [Downloadable!] (restricted)
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  10. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 777-93, August. [Downloadable!] (restricted)
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  12. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April. [Downloadable!] (restricted)
  13. Fischer Black, 1982. "General Equilibrium and Business Cycles," NBER Working Papers 0950, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1113-44, December. [Downloadable!] (restricted)
  16. Mankiw, N Gregory & Rotemberg, Julio J & Summers, Lawrence H, 1985. "Intertemporal Substitution in Macroeconomics," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 225-51, February. [Downloadable!] (restricted)
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  17. Finn Kydland & Edward C. Prescott, 1980. "A Competitive Theory of Fluctuations and the Feasibility and Desirability of Stabilization Policy," NBER Chapters, in: Rational Expectations and Economic Policy, pages 169-198 National Bureau of Economic Research, Inc. [Downloadable!]
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  20. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February. [Downloadable!] (restricted)
  21. Christopher A. Sims, 1982. "Policy Analysis with Econometric Models," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(1982-1), pages 107-164. [Downloadable!]
  22. McCallum, Bennett T, 1985. "On Consequences and Criticisms of Monetary Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 570-97, November. [Downloadable!] (restricted)
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  23. Bennett T. McCallum, 1987. "On "Real" and "Sticky-Price" Theories of the Business Cycle," NBER Working Papers 1933, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  24. Shapiro, Matthew D, 1987. "Are Cyclical Fluctuations in Productivity Due More to Supply Shocks or Demand Shocks?," American Economic Review, American Economic Association, vol. 77(2), pages 118-24, May. [Downloadable!] (restricted)
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  25. William A. Brock, 1982. "Asset Prices in a Production Economy," NBER Chapters, in: The Economics of Information and Uncertainty, pages 1-46 National Bureau of Economic Research, Inc. [Downloadable!]
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  26. Watson, Mark W., 1986. "Univariate detrending methods with stochastic trends," Journal of Monetary Economics, Elsevier, vol. 18(1), pages 49-75, July. [Downloadable!] (restricted)
  27. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
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  28. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 666-89, August. [Downloadable!] (restricted)
  29. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 23-27. [Downloadable!]
  30. Mark Rush, 1987. "Real business cycles," Economic Review, Federal Reserve Bank of Kansas City, issue Feb, pages 20-32. [Downloadable!]
  31. repec:fip:fedreq:y:1982:i:nov:p:3-12:n:v.68no.6 is not listed on IDEAS
  32. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, vol. 74(3), pages 363-80, June. [Downloadable!] (restricted)
  33. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January. [Downloadable!] (restricted)
  34. Litterman, Robert B & Weiss, Laurence M, 1985. "Money, Real Interest Rates, and Output: A Reinterpretation of Postwar U.S. Data," Econometrica, Econometric Society, vol. 53(1), pages 129-56, January. [Downloadable!] (restricted)
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  35. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January. [Downloadable!] (restricted)
  36. King, Robert G., 1986. "Money and business cycles: Comments on Bernanke and related literature," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 101-115, January. [Downloadable!] (restricted)
  37. Abraham, Katharine G & Katz, Lawrence F, 1986. "Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances?," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 507-22, June. [Downloadable!] (restricted)
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  38. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September. [Downloadable!] (restricted)
  39. Geary, Patrick T & Kennan, John, 1982. "The Employment-Real Wage Relationship: An International Study," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 854-71, August. [Downloadable!] (restricted)
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