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Real Business Cycle Models

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  • Bennett T. McCallum

Abstract

This paper attempts to provide an evaluation of both strengths and weaknesses of the real business cycle (RBC) approach to the analysis of macroeconomic fluctuations. It begins with a description of the basic analytical structure typically employed, one in which individual households make consumption and labor supply decisions while producing output from capital and labor inputs, hired on competitive markets, according to a technology that is subject to stochastic shocks. It then explores conditions on parameter values that are needed for a model of this type to yield fluctuations that provide a good quantitative match to those observed in the postwar U.S. quarterly data. The plausibility of the hypothesis that (unobservable) aggregate technology shocks have the requisite variability is considered and problems with certain cross correlations are noted. Relevant evidence obtained by formal econometric methods is summarized and a few tentative conclusions regarding business cycle research are suggested.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2480.

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Date of creation: Jan 1988
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Publication status: published as Modern Business Cycle Theory, edited by Robert J. Barro, pp. 16-50. Cambridge, MA: Harvard University Press, 1989.
Handle: RePEc:nbr:nberwo:2480

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