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Is the Business Cycles a Necessary Consequence of Stochastic Growth?

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  • Julio J. Rotemberg
  • Michael Woodford

Abstract

We compute the forecastable changes in output, consumption, and hours implied by a VAR that includes the growth rate of private value added, the share of output that is consumed, and the detrended level of private hours. We show that the size of the forecastable changes in output greatly exceeds that predicted by a standard stochastic growth model, of the kind studied by real business cycle theorists. Contrary to the model's implications, forecastable movements in labor productivity are small and only weakly related to forecasted changes in output. Also, forecasted movements in investment and hours are positively correlated with forecasted movements in output. Finally, and again in contrast to what the growth model implies, forecasted output movements are positively related to the current level of the consumption share and negatively related to the level of hours. We also show that these contrasts between the model and the observations are robust to allowance for measurement error and a variety of other types of transitory disturbances.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4650.

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Date of creation: Feb 1994
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Publication status: published as "Real Business Cycle Models and the Forecastable Movements in Outputs, Hours, and Consumption," American Economic Review, Vol. 86 (1996): 17-89.
Handle: RePEc:nbr:nberwo:4650

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  1. Robert J. Gordon, 1979. "The "End-of-Expansion" Phenomenon in Short-Run Productivity Behavior," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(2), pages 447-462.
  2. Mark W. Watson, 1991. "Measures of fit for calibrated models," Working Paper Series, Macroeconomic Issues 91-9, Federal Reserve Bank of Chicago.
  3. Plosser, C.I., 1989. "Understanding Real Business Cycles," Papers, Rochester, Business - General 89-03, Rochester, Business - General.
  4. King, R.G. & Rebelo, S.T., 1989. "Low Frequency Filtering And Real Business Cycles," RCER Working Papers 205, University of Rochester - Center for Economic Research (RCER).
  5. Evans, George W & Reichlin, Lucrezia, 1993. "Information, Forecasts and Measurement of the Business Cycle," CEPR Discussion Papers 756, C.E.P.R. Discussion Papers.
  6. Cochrane, John H, 1994. "Permanent and Transitory Components of GNP and Stock Prices," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(1), pages 241-65, February.
  7. Lippi, Marco & Reichlin, Lucrezia, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(3), pages 644-52, June.
  8. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, vol. 81(4), pages 819-40, September.
  9. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Staff Report, Federal Reserve Bank of Minneapolis 102, Federal Reserve Bank of Minneapolis.
  10. Boyan Jovanovic & Saul Lach, 1993. "Diffusion Lags and Aggregate Fluctuations. New Name: Product Innovation and the Business Cycle," NBER Working Papers 4455, National Bureau of Economic Research, Inc.
  11. John Y. Campbell, 1986. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," NBER Working Papers 1805, National Bureau of Economic Research, Inc.
  12. Allison, G. & Fudenberg, D., 1992. "Rules of Thumb for Social Learning," Working papers 92-12, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Christopher A. Sims, 1974. "Output and Labor Input in Manufacturing," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 5(3), pages 695-736.
  14. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, Elsevier, vol. 10(2), pages 139-162.
  15. Julio J. Rotemberg & Michael Woodford, 1989. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," NBER Working Papers 3206, National Bureau of Economic Research, Inc.
  16. Gamber, Edward N & Joutz, Frederick L, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(5), pages 1387-93, December.
  17. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  18. Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June.
  19. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(2-3), pages 195-232.
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Cited by:
  1. Michael T. Kiley, 1996. "Endogenous price stickiness and business cycle persistence," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 96-23, Board of Governors of the Federal Reserve System (U.S.).
  2. Frederic Dufourt, 2005. "Demand and Productivity Components of Business Cycles: Estimates and Implications," Working Papers halshs-00789009, HAL.
  3. Philip A. Shively, 2001. "Trend-stationary GNP: evidence from a new exact pointwise most powerful invariant unit root test," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 16(4), pages 537-551.
  4. Rotemberg, Julio J., 1996. "Prices, output, and hours: An empirical analysis based on a sticky price model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(3), pages 505-533, June.
  5. Robert G. King, 1995. "Quantitative theory and econometrics," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Sum, pages 53-105.

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