Real Business Cycle Theory: Wisdom or Whimsy?

Martin Eichenbaum

No 3432, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper assesses the empirical plausibility of the view that aggregate productivity shocks account for most of the variability in post World War II US output. We argue that the type of evidence forwarded by proponents of this proposition is too fragile to be believable. First, our confidence in the evidence is fundamentally affected once we abandon the fiction that we actually know the true values of the structural parameters of standard Real Business Cycle (RBC) models. What the data are telling us is that, while productivity shocks play some role in generating the business cycle, there is simply an enormous amount of uncertainty about just what percent of aggregate fluctuations they actually do account for. The answer could be 70% as Kydland and Prescott (1989) claim, but the data contain almost no evidence against either the view that the answer is really 5% or that the answer is really 200%. Second, we show that point estimates of the importance of technology shocks are extremely sensitive to small perturbations in the theory. Allowing for labor hoarding behavior in an otherwise standard RBC model reduces the ability of technology shocks to account for aggregate fluctuations by 50%. This finding provides some support for the view that many of the movements in the Solow residual which are labelled as productivity shocks may be an artifact of labor hoarding type phenomena.

Date: 1990-09
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published as Journal of Economic Dynamics and Control Vol. 15, No. 4, pp. 607-626, October 1991

Downloads: (external link)
http://www.nber.org/papers/w3432.pdf (application/pdf)

Related works:
Journal Article: Real business-cycle theory: Wisdom or whimsy? (1991)
Working Paper: Real business cycle theory: wisdom or whimsy? (1990)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:3432

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w3432

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by (wpc@nber.org).