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Resuscitating Real Business Cycles

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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
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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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  1. > Schools of Economic Thought, Epistemology of Economics > Economic Methodology > Dynamic Stochastic General Equilibrium
  2. > Macroeconomics > Economic Fluctuations > Real Business Cycle Theory
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