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Technology Shocks or Coloured Noise? Why real-business-cycle models cannot explain actual business cycles

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  • Kevin Hoover
  • Kevin Salyer

Abstract

Typically real-business-cycle models are assessed by their ability to mimic the covariances and variances of actual business cycle data. Recently, however, advocates of RBC models have used them to fit the historical path of real GDP using the Solow residual as a driving process. We demonstrate that the success of RBC models at matching historical GDP data does not confirm the validity of RBC models. Through simulations we demonstrate that the Solow residual does not carry useful information about technology shocks and that the RBC model does not add incremental information about GDP. RBC models fit historical GDP data entirely because the Solow Residual is itself just a noisy measure of GDP.

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  • Kevin Hoover & Kevin Salyer, 1998. "Technology Shocks or Coloured Noise? Why real-business-cycle models cannot explain actual business cycles," Review of Political Economy, Taylor & Francis Journals, vol. 10(3), pages 299-327.
  • Handle: RePEc:taf:revpoe:v:10:y:1998:i:3:p:299-327 DOI: 10.1080/09538259800000036
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    Cited by:

    1. Boileau, Martin & Normandin, Michel, 2003. "Labor hoarding, superior information, and business cycle dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 397-418, November.
    2. Pedro Garcia Duarte, 2015. "From real business cycle and new Keynesian to DSGE Macroeconomics: facts and models in the emergence of a consensus," Working Papers, Department of Economics 2015_05, University of São Paulo (FEA-USP).
    3. Dorofeenko, Viktor & Lee, Gabriel S. & Salyer, Kevin D., 2005. "Agency Costs and Investment Behavior," Economics Series 182, Institute for Advanced Studies.
    4. Francesco Busato, 2004. "Relative Demand Shocks," Economics Working Papers 2004-11, Department of Economics and Business Economics, Aarhus University.

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