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Keynes vs. Prescott and Solow: Identifying Sources of Business Cycle Fluctuations

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  • David N. DeJong

    (University of Pittsburgh)

  • Beth F. Ingram

    (University of Iowa)

  • Charles H. Whiteman

Abstract

Who was closer to the source of business cycle fluctuations--Keynes or Prescott and Solow? Two types of business-cycle impulses which have been associated with their names -- marginal efficiency of investment shocks (Keynes) and technology shocks (Prescott and Solow) -- are studied here in a neoclassical model which builds on the Greenwood, Hercowitz, and Huffman (1988) variable-utilization framework. The important parameters of the model are estimated using a Bayesian procedure which accommodates prior uncertainty about their magnitudes; from these estimates, posterior distributions of the two shocks are obtained. The postwar U.S. experience suggests that both shocks are important in understanding fluctuations, but that investment shocks are primarily responsible for beginning and ending recessions. * The University of Pittsburgh ** The University of Iowa

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 9504002.

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Date of creation: 12 Apr 1995
Date of revision: 18 Apr 1995
Handle: RePEc:wpa:wuwpma:9504002

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  1. Geweke, John, 1989. "Bayesian Inference in Econometric Models Using Monte Carlo Integration," Econometrica, Econometric Society, vol. 57(6), pages 1317-39, November.
  2. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  3. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  4. Ingram, B.F. & Kocherlakota, N.R. & Savin, N.E., 1992. "Explaining Business Cycles : A Multiple Shock Approach," Working Papers 92-09, University of Iowa, Department of Economics.
  5. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
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Cited by:
  1. Linnea Polgreen & Pedro Silos, 2005. "Capital-skill complementarity and inequality: a sensitivity analysis," Working Paper 2005-20, Federal Reserve Bank of Atlanta.
  2. Beatriz Rumbos & Leonardo Auernheimer, 2001. "Endogenous capital utilization in a neoclassical growth model," Atlantic Economic Journal, International Atlantic Economic Society, vol. 29(2), pages 121-134, June.

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