Real Business Cycles: A Reader

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

CHAPTER 21

INTERNATIONAL ECONOMIC REVIEW

Vol. 30, No. 4, November 1989

TIME-TO-BUILD AND AGGREGATE FLUCTUATIONS: SOME NEW EVIDENCE*

BY SUMRU 1

This paper presents maximum likelihood estimates and tests of a model similar to one Kydland and Prescott (1982) suggested. For this purpose, it derives equilibrium laws of motion for a set of aggregate variables as functions of the model’s parameters and the innovation to the technology shock. The paper shows that a single unobservable index can explain the variability in the observed series, but identifying the single index with the innovation to the technology shock implies that per capita hours is not well explained. It also shows that time-separable preferences with respect to leisure are consistent with the data.


1. INTRODUCTION

In a paper that has received much recent attention, Kydland and Prescott (1982) presented a competitive equilibrium model of cyclical fluctuations. Using the one-sector optimal growth model to construct a prototype competitive economy, they argued that postwar U. S. business cycles could be explained in terms of the dynamic response of the aggregate economy to persistent technology shocks. To provide a more complicated propagation mechanism for such shocks, they modified the optimal growth model by introducing a time-to-build feature in investment and by allowing leisure to be a durable good.

This paper presents maximum likelihood estimates and tests of a model that is similar to Kydland and Prescott’s, using postwar U. S. data for per capita hours and the growth rates of per capita output, per capita expenditures for the acquisitions of durable consumption goods and for the stocks of aggregate structures and equipment, respectively. It derives testable restrictions from the assumption that such time series are generated from the competitive equilibrium of an economy with the postulated preferences, technology, and stochastic environment. For this purpose, laws of motion describing the evolution of equilibrium quantities are calculated as functions of the underlying parameters of the model and the innovation to the technology shock.

* Manuscript received September 1986; revised October 1988.

1 I received helpful comments and suggestions from Lars Peter Hansen, Robert Litterman, Kenneth Singleton, and an anonymous referee. In addition, I thank Thomas J. Sargent for his encouragement at various times. An earlier version of this paper entitled “Gestation Lags and the Business Cycle: An Empirical Analysis, ” 1983 was presented at seminars at Carnegie-Mellon University; Massachusetts Institute of Technology; Northwestern University; and the Universities of California (Los Angeles), Chicago, Minnesota, Rochester, and Southern California; as well as at the 1984 National Bureau of Economic Research Conference on Business Fluctuations and the 1984 North American Summer Meetings of the Econometric Society. A major part of the calculations for the current draft were done on the Cray 2 computer, on a grant from the Minnesota Supercomputer Institute.

889

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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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