Current Real-Business-Cycle Theories and Agg regate Labor-Market Fluctuations

In this paper, we assess the quantitative implications of existing real-business-cycle (RBC) models for the time-series properties of average productivity and hours worked. We find that the single most salient short-coming of existing RBC models lies in their predictions for the correlation between these variables. Existing RBC models predict that this correlation is well in excess of 0.9, whereas the actual correlation is much 1closer to zero. This shortcoming leads us to add to the RBC framework aggregate demand shocks that arise from stochastic movements in government consumption. According to our empirical results, this change substantially improves the models’ empirical performance.