A Reassessment of Real Business Cycle Theory

Ellen McGrattan and Edward Prescott

No 494, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: During the downturn of 2008?2009, output and hours fell significantly, but labor productivity rose. These facts have led many to conclude that there is a significant deviation between observations and current macrotheories that assume business cycles are driven, at least in part, by fluctuations in total factor productivities of firms. We show that once investment in intangible capital is included in the analysis, there is no inconsistency. Measured labor productivity rises if the fall in output is underestimated; this occurs when there are large unmeasured intangible investments. Microevidence suggests that these investments are large and cyclically important.

Keywords: Business cycles; Productivity; Intangible capital (search for similar items in EconPapers)
JEL-codes: E13 E32 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2014-01-09
New Economics Papers: this item is included in nep-dge and nep-mac
Note: Forthcoming in: American Economic Review Papers and Proceedings
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

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Journal Article: A Reassessment of Real Business Cycle Theory (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:494

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