Real Business Cycles: A Reader

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

CHAPTER 12

Scand. J. of Economics 93(2), 161-178, 1991

The Econometrics of the General Equilibrium Approach to Business Cycles*

Finn E. Kydland

Carnegie-Mellon University, Pittsburgh PA, USA

Edward C. Prescott

Federal Reserve Bank and University of Minnesota, Minneapolis MN, USA

Abstract

The founding fathers of the Econometric Society defined econometrics to be quantitative economic theory. A vision of theirs was the use of econometrics to provide quantitative answers to business cycle questions. The realization of this dream required a number of advances in pure theory—in particular, the development of modern general equilibrium theory. The econometric problem is how to use these tools along with measurement to answer business cycle questions. In this essay, we review this econometric development and contrast it with the econometric approach that preceded it.


I. Introduction

Early in this century American institutionists and members of the German historical school attacked—and rightfully so—neoclassical economic theory for not being quantitative. This deficiency bothered Ragnar Frisch and motivated him, along with Irving Fisher, Joseph Schumpeter, and others, to organize the Econometric Society in 1930. The aim of the society was to foster the development of quantitative economic theory—that is, the development of what Frisch labeled econometrics. Soon after its inception, the society started the journal Econometrica. Frisch was the journal’s first editor and served in this capacity for 25 years.

In his editorial statement introducing the first issue of Econometrica (1933), Frisch makes it clear that his motivation for starting the Econo-

* We acknowledge useful comments of Javier Diaz-Giménez on an early draft. This research was partly supported by a National Science Foundation Grant. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

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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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