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A Reassessment of Real Business Cycle Theory

Author

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  • Ellen R. McGrattan
  • Edward C. Prescott

Abstract

During the downturn of 2008?2009, output and hours fell significantly, but labor productivity rose. These facts have led many to conclude that there is a significant deviation between observations and current macrotheories that assume business cycles are driven, at least in part, by fluctuations in total factor productivities of firms. We show that once investment in intangible capital is included in the analysis, there is no inconsistency. Measured labor productivity rises if the fall in output is underestimated; this occurs when there are large unmeasured intangible investments. Microevidence suggests that these investments are large and cyclically important.

Suggested Citation

  • Ellen R. McGrattan & Edward C. Prescott, 2014. "A Reassessment of Real Business Cycle Theory," Staff Report 494, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:494
    Note: Forthcoming in: American Economic Review Papers and Proceedings
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    References listed on IDEAS

    as
    1. Lee E. Ohanian & John B. Taylor & Ian J. Wright (ed.), 2012. "Government Policies and the Delayed Economic Recovery," Books, Hoover Institution, Stanford University, number 6, January.
    2. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2007. "Business Cycle Accounting," Econometrica, Econometric Society, vol. 75(3), pages 781-836, May.
    3. Ellen R. McGrattan & Edward C. Prescott, 2012. "The Labor Productivity Puzzle," Book Chapters, in: Lee E. Ohanian & John B. Taylor & Ian J. Wright (ed.), Government Policies and the Delayed Economic Recovery, chapter 6, Hoover Institution, Stanford University.
    4. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
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    More about this item

    Keywords

    Business cycles; Productivity; Intangible capital;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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