Recent empirical work has suggested that in response to a positive technology shock employment shows a persistent decline. This finding has raised doubts concerning the relevance of the RBC model as well as the quantitative significance of technology shocks as a source of aggregate fluctuations. We show that the standard, open economy, flexible price RBC model can easily match the negative conditional correlation between productivity and employment quite well if domestic and foreign goods are not good substitutes in the short run. The computed variance-decompositions also suggest that there is no empirical inconsistency between matching this correlation and accepting that technology shocks are the main source of variation in output while demand shocks are the main source of variation in employment. Moreover, using a low rather than a high degree of substitution does not worsen model performance along any other dimensions.
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Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number
dp0217.
Find related papers by JEL classification: E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
King, Robert G. & Rebelo, Sergio T., 1999.
"Resuscitating real business cycles,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007
Elsevier.
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