Current real business cycle theories and aggregate labor market fluctuations

Lawrence Christiano and Martin Eichenbaum

No 24, Discussion Paper / Institute for Empirical Macroeconomics from Federal Reserve Bank of Minneapolis

Abstract: In the 1930s, Dunlop and Tarshis observed that the correlation between hours worked and the return to working is close to zero. This 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 consumption shocks to influence labor market dynamics in a way suggested by Aschauer (1985), Baro (1981, 1987), and Kormendi (1983). This modification can, in principle, bring the models into closer conformity with the data. Our results indicate that when aggregate demand shocks arising from stochastic movements in government consumption are incorporated into the analysis, and an empirically plausible degree of measurement error is allowed for, the models empirical performance is substantially improved.

Keywords: Business cycles; Labor market; Econometric models (search for similar items in EconPapers)
Date: 1990
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Citations: View citations in EconPapers (180)

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Related works:
Journal Article: Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations (1992)
Working Paper: Current real business cycle theories and aggregate labor market fluctuations (1990)
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