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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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 Salyer & Kevin Hoover, 2003. "Technology Shocks Or Colored Noise? Why Real-Business-Cycle Models Cannot Explain Actual Business Cycles," Working Papers 9729, University of California, Davis, Department of Economics.
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Cahiers de recherche CREFE / CREFE Working Papers
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