Technology Shocks Or Colored Noise? Why Real-Business-Cycle Models Cannot Explain Actual Business Cycles
AbstractTypically 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 InfoPaper provided by University of California, Davis, Department of Economics in its series Working Papers with number 9729.
Date of creation: 09 Jan 2003
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Other versions of this item:
- Kevin Hoover & Kevin Salyer, 1998. "Technology Shocks or Coloured Noise? Why real-business-cycle models cannot explain actual business cycles," Review of Political Economy, Taylor & Francis Journals, vol. 10(3), pages 299-327.
- Kevin D. Hoover & Kevin D. Salyer, . "Technology Shocks Or Colored Noise? Why Real-Business-Cycle Models Cannot Explain Actual Business Cycles," Department of Economics 97-29, California Davis - Department of Economics.
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- Dorofeenko, Viktor & Lee, Gabriel S. & Salyer, Kevin D., 2005. "Agency Costs and Investment Behavior," Economics Series 182, Institute for Advanced Studies.
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- Francesco Busato, 2004. "Relative Demand Shocks," Economics Working Papers 2004-11, School of Economics and Management, University of Aarhus.
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