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Near-Rational Alternatives and the Empirical Evaluation of Real Business Cycle Models

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  • Anthony A. Smith, Jr.

Abstract

This paper shows that if the consumers in a "standard" real business cycle (RBC) model are permitted to use near-rational decision rules -- that is, decision rules from which they suffer trivial utility losses -- then it is difficult to distinguish the standard model from several competing extensions on the basis of the models' implications for a small set of key time series statistics. Moreover, there exist near-rational alternatives to the standard model which reproduce exactly the values of these statistics in observed time series. These findings suggest that RBC researchers should examine much larger sets of second moments when evaluating the empirical performance of RBC models.

Suggested Citation

  • Anthony A. Smith, Jr., 1993. "Near-Rational Alternatives and the Empirical Evaluation of Real Business Cycle Models," GSIA Working Papers 239, Carnegie Mellon University, Tepper School of Business.
    • Handle: RePEc:cmu:gsiawp:239
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    File URL: http://fasttone.tepper.cmu.edu/tony/near2.ps
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    1. Arellano, Cristina & Maliar, Lilia & Maliar, Serguei & Tsyrennikov, Viktor, 2016. "Envelope condition method with an application to default risk models," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 436-459.

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