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The Right Fit for the Wrong Reasons: Real Business Cycle in an Oil-Dependent Economy

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  • Miguel Angel Santos

    () (Center for International Development at Harvard University)

Abstract

Venezuela is an oil-dependent economy subject to large exogenous shocks, with a rigid labor market. These features go straight at the heart of two weaknesses of real business cycle (RBC) theory widely reported in the literature: Neither shocks are volatile enough nor real salaries are sufficiently flexible as required by the RBC framework to replicate the behavior of the economy. We calibrate a basic RBC model and compare a set of relevant statistics from RBC-simulated time series with actual data for Venezuela and the benchmark case of the United States (1950-2008). In spite of Venezuela being one of the most heavily intervened economies in the world, RBC-simulated series provide a surprisingly good fit when it comes to the non-oil sector of the economy, and in particular for labor markets. Large restrictions on dismissal and widespread minimum (nominal) wage put all the burden of adjustment on prices; which translate into highly volatile real wages.

Suggested Citation

  • Miguel Angel Santos, 2015. "The Right Fit for the Wrong Reasons: Real Business Cycle in an Oil-Dependent Economy," CID Working Papers 64, Center for International Development at Harvard University.
  • Handle: RePEc:cid:wpfacu:64
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    References listed on IDEAS

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    More about this item

    Keywords

    Macroeconomics; RBC; oil shocks; labor markets; Venezuela;

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

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