Journal of Economic Dynamics and Control 15 (1991) 607-626. North-Holland
Real business-cycle theory *
Wisdom or whimsy?
NBER and The Federal Reserve Bank of Chicago
Received January 1990
This paper assesses the empirical plausibility of the view that aggregate productivity shocks 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%.
This paper discusses two questions which are of fundamental importance to macroeconomists. First—how important have aggregate technology shocks been as sources of fluctuations to post-war US aggregate output? Second, how reliable are existing answers to the first question?
The answers to these questions obviously matter from the perspective of optimal public policy. But just as important, the perceived answers also matter because they influence the research agenda of macroeconomists. Around 1977 it seemed just as obvious to the representative graduate student as it was to Milton Friedman or Robert Lucas that monetary instability is a
* This paper is based on an invited talk, presented at the Society of Economic Dynamics and Control Meeting in Minneapolis, Minnesota, on June 29th, 1990. The author is very grateful to Craig Burnside, Lawrence Christiano, and Sergio Rebelo for their advice and help in preparing this paper. Thomas Sargent and Mark Watson provided numerous useful comments.
0165-1889/91/$03.50©1991—Elsevier Science Publishers B. V. (North-Holland)