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Resuscitating Real Business Cycles

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Author Info
Robert G. King () (University of Virginia and NBER)
Sergio T. Rebelo () (Northwestern University and NBER)

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Abstract

The Real Business Cycle (RBC) research program has grown spectacularly over the last decade, as its concepts and methods have diffused into mainstream macroeconomics. Yet, there is increasing skepticism that technology shocks are a major source of business fluctuations. This chapter exposits the basic RBC model and shows that it requires large technology shocks to produce realistic business cycles. While Solow residuals are sufficiently volatile, these imply frequent technological regress. Productivity studies permitting unobserved factor variation find much smaller technology shocks, suggesting the imminent demise of real business cycles. However, we show that greater factor variation also dramatically amplifies shocks: a RBC model with varying capital utilization yields realistic business cycles from small, nonnegative changes in technology.

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Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 467.

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Length: 101 pages
Date of creation: Jan 2000
Date of revision:
Publication status: Forthcoming in the Handbook of Macroeconomics, edited by Michael Woodford and John Taylor
Handle: RePEc:roc:rocher:467

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Postal: UNIVERSITY OF ROCHESTER, CENTER FOR ECONOMIC RESEARCH, DEPARTMENT OF ECONOMICS, HARKNESS 231 ROCHESTER NEW YORK 14627 U.S.A.

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Keywords: Macroeconomics Business cycles

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Find related papers by JEL classification:
E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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