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Technology Shocks Or Colored Noise? Why Real-Business-Cycle Models Cannot Explain Actual Business Cycles

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  • Kevin Salyer
  • Kevin Hoover

    (Department of Economics, University of California Davis)

Abstract

Typically real-business-cycle models are assessed by their ability to mimic the covariances and variances of actual business cycle data. Recently, however, advocates of RBC models have used them to fit the historical path of real GDP using the Solow residual as a driving process. We demonstrate that the success of RBC models at matching historical GDP data does not confirm the validity of RBC models. Through simulations we demonstrate that the Solow residual does not carry useful information about technology shocks and that the RBC model does not add incremental information about GDP. RBC models fit historical GDP data entirely because the Solow residual is itself just a noisy measure of GDP.

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Bibliographic Info

Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 9729.

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Date of creation: 09 Jan 2003
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Handle: RePEc:cda:wpaper:97-29

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Cited by:
  1. Dorofeenko, Viktor & Lee, Gabriel S. & Salyer, Kevin D., 2005. "Agency Costs and Investment Behavior," Economics Series 182, Institute for Advanced Studies.
  2. Martin Boileau & Michel Normandin, 2001. "Labor Hoarding, Superior Information and Business Cycle Dynamics," Cahiers de recherche CREFE / CREFE Working Papers 129, CREFE, Université du Québec à Montréal.
  3. Francesco Busato, 2004. "Relative Demand Shocks," Economics Working Papers 2004-11, School of Economics and Management, University of Aarhus.

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