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Is Theory Really Ahead of Measurement? Current Real Business Cycle Theories and Aggregate Labor Market Fluctuations

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  • Lawrence J. Christiano
  • Martin Eichenbaum

Abstract

In the l93Os, Dunlop and Tarshis observed that the correlation between hours and wages is close to zero. This classic observation has become a litmus test by which macroeconomic models are judged. Existing real business cycle models fail this test dramatically. Based on this result, we argue that technology shocks cannot be the sole impulse driving post-war U.S. business cycles. We modify prototypical real business cycle models by allowing government spending shocks to influence labor market dynamics in a way suggested by Aschauer (1985), Barro (1981, 1987) and Kormendi (1983), This modification can, in principle, bring the models into closer conformity with the data. While the empirical performance of the models is significantly improved, they still fail to account for the Dunlop-Tarshis observation. Accounting for that observation will require further advances in model development. Consequently, we conclude that theory is behind, not ahead of, business cycle measurement.

Suggested Citation

  • Lawrence J. Christiano & Martin Eichenbaum, 1988. "Is Theory Really Ahead of Measurement? Current Real Business Cycle Theories and Aggregate Labor Market Fluctuations," NBER Working Papers 2700, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2700
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    Citations

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    Cited by:

    1. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-1187, December.
    2. Dow, James Jr., 1995. "Real business cycles and labor markets with imperfectly flexible wages," European Economic Review, Elsevier, vol. 39(9), pages 1683-1696, December.
    3. Brunila, Anne, 1997. "Current income and private consumption: Saving decisions: Testing the finite horizon model," Bank of Finland Research Discussion Papers 6/1997, Bank of Finland.
    4. Ambler, Steven & Cardia, Emanuela & Phaneuf, Louis, 1992. "Contrats de salaire, croissance endogène et fluctuations," L'Actualité Economique, Société Canadienne de Science Economique, vol. 68(1), pages 175-204, mars et j.
    5. Aiyagari, S. Rao & Christiano, Lawrence J. & Eichenbaum, Martin, 1992. "The output, employment, and interest rate effects of government consumption," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 73-86, October.
    6. Cooley, Thomas F. & Hansen, Gary D., 1992. "Tax distortions in a neoclassical monetary economy," Journal of Economic Theory, Elsevier, vol. 58(2), pages 290-316, December.
    7. Fabrice Collard, 1994. "Effets d'apprentissage et de rationalisation dans un modèle de croissance cyclique," Revue Économique, Programme National Persée, vol. 45(3), pages 869-882.
    8. Ambler, Steve, 1991. "Les modèles du cycle économique face à la corrélation productivité-emploi," L'Actualité Economique, Société Canadienne de Science Economique, vol. 67(4), pages 532-548, décembre.
    9. Brunila, Anne, 1996. "Fiscal policy and private consumption : Saving decisions : Evidence from Finland," Research Discussion Papers 28/1996, Bank of Finland.
    10. Priyo, Asad Karim Khan, 2009. "Impact of the Exchange Rate Regime Change on the Value of Bangladesh Currency," MPRA Paper 117987, University Library of Munich, Germany.
    11. Kydland, Finn E & Prescott, Edward C, 1991. "Hours and Employment Variation in Business Cycle Theory," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 1(1), pages 63-81, January.
    12. Brunila, Anne, 1997. "Current income and private consumption : Saving decisions : Testing the finite horizon model," Research Discussion Papers 6/1997, Bank of Finland.
    13. Bils, Mark & Cho, Jang-Ok, 1994. "Cyclical factor utilization," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 319-354, April.
    14. Hansen, Gary D., 1997. "Technical progress and aggregate fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 21(6), pages 1005-1023, June.
    15. Brunila, Anne, 1996. "Fiscal policy and private consumption: Saving decisions: Evidence from Finland," Bank of Finland Research Discussion Papers 28/1996, Bank of Finland.
    16. Yang, Mingyi, 2020. "Remeasuring and decomposing stochastic trends in business cycles," Research in Economics, Elsevier, vol. 74(4), pages 354-362.
    17. Jess Benhabib & Randall Wright & Richard Rogerson, 1990. "Homework in Macoreconomics I: Basic Theory (Part I of II)," NBER Working Papers 3344, National Bureau of Economic Research, Inc.
    18. repec:zbw:bofrdp:1997_006 is not listed on IDEAS
    19. McGrattan, Ellen R., 1994. "The macroeconomic effects of distortionary taxation," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 573-601, June.
    20. Michał Brzoza-Brzezina & Jacek Suda, 2021. "Are DSGE models irreparably flawed?," Bank i Kredyt, Narodowy Bank Polski, vol. 52(3), pages 227-252.
    21. Carlos Díaz-Moreno & José E. Galdón-Sánchez, 1999. "How important is firm behavior to understand unemployment? Evidence from Spain," Investigaciones Economicas, Fundación SEPI, vol. 23(2), pages 203-224, May.
    22. repec:zbw:bofrdp:1996_028 is not listed on IDEAS

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