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A Reassessment of Real Business Cycle Theory

  • McGrattan, Ellen R.

    (Federal Reserve Bank of Minneapolis)

  • Prescott, Edward C.

    (Federal Reserve Bank of Minneapolis)

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.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 494.

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Length: 13 pages
Date of creation: 09 Jan 2014
Date of revision:
Handle: RePEc:fip:fedmsr:494
Note: Forthcoming in: American Economic Review Papers and Proceedings
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  1. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
  2. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2006. "Business cycle accounting," Staff Report 328, Federal Reserve Bank of Minneapolis.
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