Real Business Cycles: A Reader

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

CHAPTER 24

JAMES HARTLEY

Mount Holyoke College

South Hadley, Massachusetts

KEVIN SALYER

STEVEN SHEFFRIN

University of California, Davis Davis, California

Calibration and Real Business Cycle Models: An Unorthodox Experiment*

This paper examines the calibration methodology used in real business cycle (RBC) theory. We confront the calibrator with data from artificial economies (various Keynesian macroeconomic models) and examine whether a prototypical real business cycle model, when calibrated to these data sets using standard methods, can match a selected set of sample moments. We find that the calibration methodology does constitute a discriminating test in that the calibrated real business cycle models cannot match the moments from all the artificial economies we study. In particular, we find the RBC model can only match the moments of economies whose moments are close to actual U. S. data.


1. Introduction

Nearly a decade ago, Kydland and Prescott (1982) demonstrated that a simple optimal growth model subject to persistent technological shocks would exhibit characteristics that were similar in important respects to actual macroeconomic data. It is hard to exaggerate the practical importance of their finding. Not only did it begin an influential literature on business cycles (i.e., real business cycles) but it transformed the practice of other economists, both theoretical and applied, as well. It has become quite common now for many macroeconomists to begin with the real business cycle model as a basic framework and then use embellishments to highlight additional features of the data.

Critics of real business cycle models, however, have been uneasy about the empirical methodology used in support of the model. Specifically, these

* We are indebted to Ray Fair, Kevin Hoover, Stephen LeRoy, James Nason, Linda Tesar and Randy Wright for insightful comments and suggestions.

Journal of Macroeconomics, Winter 1997, Vol. 19, No. 1, pp. 1-17

Copyright © 1997 by Louisiana State University Press

0164-0704/97/$1.50

1

-496-

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