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Resuscitating Real Business Cycles

  • Robert G. King
  • Sergio T. Rebelo

The Real Business Cycle (RBC) research program has grown spectacularly over the last decade, as its concepts and methods have diffused into mainstream macroeconomics. Yet, there is increasing skepticism that technology shocks are a major source of business fluctuations. This chapter exposits the basic RBC model and shows that it requires large technology shocks to produce realistic business cycles. While Solow residuals are sufficiently volatile, these imply frequent technological regress. Productivity studies permitting unobserved factor variation find much smaller technology shocks, suggesting the imminent demise of real business cycles. However, we show that greater factor variation also dramatically amplifies shocks: a RBC model with varying capital utilization yields realistic business cycles from small, nonnegative changes in technology.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7534.

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Date of creation: Feb 2000
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Publication status: Published as "Real Business Cycles and the Test of the Adelmans", Journal of Monetary Economics, Vol. 33, no. 2 (1994): 405-438.
Handle: RePEc:nbr:nberwo:7534
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