As will become clear below, our focus is on real business cycles narrowly construed as perfectly competitive representative agent models driven by real shocks. A number of recent developments have extended models with roots in Kydland and Prescott (1982 ) to include monetary factors, limited heterogeneity among agents, non-Walrasian features, and imperfect competition. These models are ably surveyed in chapters 7-9 of Cooley (1995b). One way to view this literature is as a constructive response to some of the difficulties with the narrow real business cycle model that we evaluate.
Friedman’s monetarist model is distinguished from Lucas’s new classical monetary model in that Friedman imagines that people can be systematically mistaken about the true state of real wages for relatively long periods, while Lucas argues that people have rational expectations (i.e., they make only unsystematic mistakes) and, therefore, correct their judgments about the real wage quickly.
Lucas (in Snowden, Vane and Wynarczyk, 1994:222) accepts that his previous characterization of the Austrians as precursors to new classical business cycle theory was incorrect.
Equation (1.1) is a snapshot of the economy at a particular time. In fact, variables in the model are growing. We could indicate this with subscripts indexing the relevant time, but this would simply clutter the notation unnecessarily.
There is a large literature on endogenous growth models (see, e.g., the symposium in the Journal of Economic Perspectives, 1994).
Cooley and Prescott (1995, sec. 4) discusses the issues related to establishing an appropriate correspondence between the real business cycle model and the national accounts to permit the calibration of the model.
It is actually a debated question whether microeconomic studies do in fact provide the necessary parameters. Prescott (1986a : 14) cites Lucas’s (1980:712) argument that we have “a wealth of inexpensively available data” of this sort. However, Hansen and Heckman (1996 : 93-94) argue that in this regard Prescott is wrong. As evidence they point to Shoven and Whalley (1992:105), who rather candidly admit that “it is surprising how sparse (and sometimes contradictory) the literature is on some key elasticity values. And although this procedure might sound straightforward, it is often exceedingly difficult because each study is different from every other. ” (Cf. the debate between Summers (1986 ) and Prescott (1986b ) about whether the parameters used in Prescott (1986a ) are the appropriate ones.)
Details on how to solve these sorts of models are provided in Chapter 2. 10 Despite this argument, Lucas’s view of real business cycle models is rather favorable. See, e.g., the discussion in Manuelli and Sargent (1988).
Although we refer to z as “the technology shock, ” this terminology is not universal. Generally, z will be a persistent process; for example, zt=ρzt+εt, with ρ>0 and εt an independent, identically distributed random variable. Some economists identify εt as “the technology shock. ” Similarly, some economists identify zt rather than Zt as the “Solow residual. ”
These reasons are elaborated in Hartley (1997).
The classic reference is Gorman (1953); the literature is summarized in Stoker (1993).
Coleman (1990) calls this the micro-to-macro transition and provides an
Questia, a part of Gale, Cengage Learning. www.questia.com
Book title: Real Business Cycles: A Reader.
Contributors: James E. Hartley - Editor, Kevin D. Hoover - Editor, Kevin D. Salyer - Editor.
Place of publication: London.
Publication year: 1998.
Page number: 34.
This material is protected by copyright and, with the exception of fair use, may
not be further copied, distributed or transmitted in any form or by any means.