Real Business Cycles: A Reader

By James E. Hartley; Kevin D. Hoover et al. | Go to book overview

CHAPTER 7

Journal of Monetary Economics 21 (1988) 195-232. North-Holland

PRODUCTION, GROWTH AND BUSINESS CYCLES

I. The Basic Neoclassical Model

Robert G. KING, Charles I. PLOSSER and Sergio T. REBELO *

University of Rochester, Rochester, NY 14627, USA

Received September 1987, final version received December 1987 This paper presents the neoclassical model of capital accumulation augmented by choice of labor supply as the basic framework of modern real business cycle analysis. Preferences and production possibilities are restricted so that the economy displays steady state growth. Then we explore the implications of the basic model for perfect foresight capital accumulation and for economic fluctuations initiated by impulses to technology. We argue that the neoclassical approach holds considerable promise for enhancing our understanding of fluctuations. Nevertheless, the basic model does have some important shortcomings. In particular, substantial persistence in technology shocks is required if the model economy is to exhibit periods of economic activity that persistently deviate from a deterministic trend.


1. Introduction and summary

Real business cycle analysis investigates the role of neoclassical factors in shaping the character of economic fluctuations. In this pair of essays, we provide an introduction to the real business cycle research program by considering the basic concepts, analytical methods and open questions on the frontier of research. The focus of the present essay is on the dynamic aspects of the basic neoclassical model of capital accumulation. This model is most frequently encountered in analyses of economic growth, but we share Hicks’ (1965, p. 4) perspective that it is also a basic laboratory for investigating more general dynamic phenomena involving the choice of consumption, work effort and investment.

Our use of the neoclassical model of capital accumulation as the engine of analysis for the investigation of economic fluctuations raises a number of central issues. First, what role does economic growth play in the study of

*The authors acknowledge financial support from the National Science Foundation. King and Plosser have joint affiliations with the Department of Economics and the W. E. Simon Graduate School of Business, University of Rochester. Rebelo is affiliated with the Department of Economics, University of Rochester and the Department of Economics, Portuguese Catholic University. We have benefited from the comments of Andrew Abel and Larry Christiano, as well as from those of seminar participants at the Federal Reserve Bank of Richmond, Brasenose College, Oxford, Institute for International Economic Studies, University of Stockholm, Northwestern University, Yale University, and Columbia University.

0304-3932/88/$3.50 ©1988, Elsevier Science Publishers B. V. (North-Holland)

-108-

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Real Business Cycles: A Reader
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Acknowledgements xi
  • Part I - Introduction 1
  • Chapter 1 - The Limits of Business Cycle Research 3
  • Notes 34
  • Chapter 2 - A User's Guide to Solving Real Business Cycle Models 43
  • Part II - The Foundations of Real Business Cycle Modeling 55
  • Chapter 3 57
  • Chapter 4 83
  • References 96
  • Chapter 5 97
  • Chapter 6 102
  • Chapter 7 108
  • Part III - Some Extensions 147
  • Chapter 8 149
  • Chapter 9 168
  • References 178
  • Chapter 10 - Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations 179
  • Chapter 11 - The Inflation Tax in a Real Business Cycle Model 200
  • Part IV - The Methodology of Equilibrium Business Cycle Models 217
  • Chapter 12 219
  • Chapter 13 237
  • Chapter 14 254
  • Chapter 15 272
  • Part V - The Critique of Calibration Methods 293
  • Chapter 16 295
  • Chapter 17 - Measures of Fit for Calibrated Models 302
  • Chapter 18 333
  • Chapter 19 355
  • Part VI - Testing the Real Business Cycle Model 381
  • Chapter 20 - Business Cycles: Real Facts and a Monetary Myth 383
  • References 398
  • Chapter 21 399
  • Chapter 22 - Evaluating a Real Business Cycle Model 431
  • Chapter 23 462
  • Chapter 24 496
  • Chapter 25 513
  • Chapter 26 - Did Technology Shocks Cause the 1990-1991 Recession? 533
  • Part VII - The Solow Residual 541
  • Chapter 27 - Technical Change and the Aggregate Production Function 543
  • Chapter 28 552
  • Chapter 29 564
  • Chapter 30 - Output Dynamics in Real-Business-Cycle Models 571
  • Part VIII - Filtering and Detrending 591
  • Chapter 31 - Postwar U. S. Business Cycles: an Empirical Investigation 593
  • Chapter 32 609
  • Chapter 33 626
  • Index 652
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