Output Dynamics in Real-Business-Cycle Models

Fluctuations in convex models of endogenous growth, II: Business cycle properties

“…The difference in hours worked is the most dramatic, with the model displaying only 15% of the variability found in the data. 8 This confirms the well-known result that RBC models generate little amplification of business cycle shocks. In sum, the endogenous growth model studied here performs better than its exogenous growth counterpart on these dimensions, particularly in the volatility of hours worked.…”

“…In the exogenous growth model, in all cases considered, the autocorrelation of output growth is close to zero. This, of course, is just another instance of the well known failure of RBC models to display realistic propagation mechanisms (see Cogley and Nason, 1995). Second, in the endogenous growth model the autocorrelation of hours worked matches closely that of the exogenous shock process; in fact, for the case with δ k = δ h , these would match exactly (since k/h is constant).…”

“…None of the substantive results presented in this paper are sensitive to this choice. 8 The smallest value of σ for which we were able to obtain accurate solutions was 0.65. This case constitutes the "best fit" for the RBC model, with σ ¡ γ y ¢ still only 83%, and σ (n) /E (n) only 28%, of the US values.…”

“…In order to generate labor supply volatility close to that of the US data, the standard framework has been generalized to include indivisible labor (see Hansen, 1985); home production (see Benhabib, Rogerson and Wright, 1991;and Greenwood and Hercowitz, 1991); cyclical factor utilization (see Burnside and Eichenbaum ,1996;and King and Rebelo, 1999); and a separate, unshocked, sector producing human capital (see Marquis, 1998 and. Variations of the basic setup designed to produce autocorrelated output growth include labor market search (see Merz, 1995;and Andolfatto, 1996); cyclical capital utilization (see Burnside and Eichenbaum, 1996); costs of adjustment (see Cogley and Nason, 1995); extreme "time-to-build" restrictions (see Christiano and Todd, 1996); learningby-doing and externalities in aggregate labor productivity (see Collard, 1999); and different technologies used to produce physical goods and human capital, as well the incidence of shocks across sectors (see Perli and Sakellaris, 1998).…”

“…Even though the real business cycle (RBC) program has been quite successful in accounting for the cyclical properties of post-war aggregate data (see Cooley, 1995, for an excellent review), it has some shortcomings. Those that we find particularly important are: (1) the "trend" in output and its components -and, hence, the methods used to remove the trend -have been taken as exogenous, and independent of the sources of fluctuations; (2) the models predict substantially lower variability of labor supply than that observed in the data unless utility is linear in leisure (or, equivalently, there is an indivisibility in labor supply and lotteries are introduced); (3) the models must resort to unobservable, or at least difficult to measure, costs of adjustment, margins of variation, or asymmetries to mimic the persistence of growth rates (see Cogley and Nason, 1995, for a discussion); and (4) since the properties of the models' time series are not sensitive to the specification of the degree of intertemporal substitution, it is difficult to estimate this parameter in a way that is consistent with the theory, though this parameter is critical in understanding the economy's response to exogenous shocks.…”