Real business-cycle theory. Wisdom or whimsy?

Martin S Eichenbaum*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

36 Scopus citations

Abstract

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%.

Original languageEnglish (US)
Pages (from-to)607-626
Number of pages20
JournalJournal of Economic Dynamics and Control
Volume15
Issue number4
DOIs
StatePublished - Jan 1 1991

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

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