Anticipation and Real Business Cycles

Standard real business cycle (RBC) theory assumes that changes in economic conditions are unanticipated. We argue that upcoming changes are often well anticipated. Employing the RBC methodology to evaluate models when changes in economic conditions are fully anticipated provides evidence on the relevance of this alternative. We find that anticipation effects i) reduce the exogenous volatility required for the models to explain output folatility, ii) improves or leaves unchanged, the model predictions for the data moments studied and, iii) can go some way to providing realistic internal propagation mechanisms within theoretical frameworks.