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Are taste and technology parameters stable? a test of "deep" parameter stability in real business cycle models of the U.S. economy

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Author Info
Daniel G. Swaine
Abstract

Lucas (1976) criticized Keynesian models because of parametric instability. For many economists, the "Lucas critique" provided a reason to replace the Keynesian approach with equilibrium models of the business cycle. One example of the equilibrium approach is the Real Business Cycle (RBC) model. However, RBC models have not been subjected to the same scrutiny of tests of parameter instability. We present a prototypical RBC model and subject it to structural change tests. Our results document evidence of extensive parameter instability. Thus, the "Lucas critique" is applicable and we conclude that the single representative agent class of RBC models has an invalid structural form.>

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Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 01-05.

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Date of creation: 2001
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Handle: RePEc:fip:fedbwp:01-05

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Keywords: Business cycles Business forecasting

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