Real business-cycle theory. Wisdom or whimsy?

This paper assesses the empirical plausibility of the view that aggregate productivity stocks account for most of the variability in post-World War II US output. We argue that the type of evidence forwarded by proponents of this proposition is too fragile to be believable. The answer could be 70% as Kydland and Prescott (1989) claim, but the data contain almost no evidence against either the view that the answer is really 5% or that the answer is really 200%. Moreover point estimates of the importance of technology shocks are extremely sensitive to small perturbations in the theory. Depending on the sample period investigated, allowing for labor-hoarding behavior in an otherwise standard RBC model reduces the ability of technology shocks to account for aggregate fluctuations by between 30% to 60%.