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Real Business Cycles: Is Neglecting Demand Shocks Justified ?

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  • Entorf, Horst

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES); University of Mannheim)

Abstract

Real business cycle models generally neglect demand shocks. Technological productivity shocks are the primary source of economic fluctuations. The multisectoral consequences of this assumption are described in the well-known model of Long and Plosser (1983). The presented paper shows that according to their view consumer goods sectors must be found in lagging positions. However, generalizing the strong assumption of pure supply driven dynamics by some demand- determined influences leads to ambiguous theoretical results such that only empirical evidence can answer the question whether sectoral lead-lag relationship are in accordance with real business cycle theory. Using cross spectral analysis and causality tests leads to a rejection of the Long and Plosser view of intersectoral comovements. On the contrary, the empirical results suggest that the backward propagation mechanism of demand shocks dominates the forward propagation of supply disturbance.

Suggested Citation

  • Entorf, Horst, 1990. "Real Business Cycles: Is Neglecting Demand Shocks Justified ?," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1991002, Universit√© catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvir:1991002
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    Cited by:

    1. Lucke, Bernd, 1998. "Productivity shocks in a sectoral real business cycle model for West Germany," European Economic Review, Elsevier, vol. 42(2), pages 311-327, February.
    2. Swee-Lean Chan, 2002. "Responses of selected economic indicators to construction output shocks: the case of Singapore," Construction Management and Economics, Taylor & Francis Journals, vol. 20(6), pages 523-533.

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    Keywords

    business cycles; economic models;

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