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Macroeconomic Frictions: What have we Learned from the Real Business Cycle Research Programm ?

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  • Jean-Pierre DANTHINE
  • John B. DONALDSON

Abstract

One interpretation of the RBC research program is that it was meant to identify and incorporate into dynamic general equilibrium models those market imperfections which are most relevant for macroeconomic theory and policy. This paper reviews the methodological basis for this interpretation. It then discusses the empirical foundations for some of the many frictions that have found their way into RBC models including efficiency wages, labour contracts, nominal price rigidities, limited market participation, imperfect competition and expectational errors. We find that the 'necessity' of these frictions is better established in some cases than in others. While one is lead to the prediction that the 'next neo-classical synthesis' will be a dynamic stochastic general equilibrium with frictions, it is premature to decide which specific friction will necessarily be taken on board.

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Bibliographic Info

Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 9919.

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Length: 26 pages
Date of creation: Nov 1999
Date of revision:
Publication status: Published in Advances in Macroeconomic Theory, J. Drèze (ed), IEA Conference volume No 133, Palgrave, 2001, pp. 56-75
Handle: RePEc:lau:crdeep:9919

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
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Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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Keywords: Business cycle; neo-classical synthesis; market frictions;

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References

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  1. Gary D. Hansen & Randall Wright, 1992. "The labor market in real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 2-12.
  2. Collard, Fabrice & de la Croix, David, 1996. "Gift exchange and the business cycle: the fair wage strikes back," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1997008, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Apr 1997.
  3. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  4. Gomes, Joao F & Greenwood, Jeremy & Rebelo, Sérgio, 1997. "Equilibrium Unemployment," CEPR Discussion Papers 1602, C.E.P.R. Discussion Papers.
  5. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
  7. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
  8. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  9. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Staff Report 227, Federal Reserve Bank of Minneapolis.
  10. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
  11. Cooley, Thomas F. & Quadrini, Vincenzo, 2004. "Optimal monetary policy in a Phillips-curve world," Journal of Economic Theory, Elsevier, vol. 118(2), pages 174-208, October.
  12. Robert G. King & Mark W. Watson, 1995. "Money, prices, interest rates and the business cycle," Working Paper Series, Macroeconomic Issues 95-10, Federal Reserve Bank of Chicago.
  13. Uhlig, H.F.H.V.S., 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," Discussion Paper 1999-28, Tilburg University, Center for Economic Research.
  14. Cogley, Timothy & Nason, James M, 1995. "Output Dynamics in Real-Business-Cycle Models," American Economic Review, American Economic Association, vol. 85(3), pages 492-511, June.
  15. Hess, Gregory D & Shin, Kwanho, 1997. "International and Intranational Business Cycles," Oxford Review of Economic Policy, Oxford University Press, vol. 13(3), pages 93-109, Autumn.
  16. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  17. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
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