NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Real Business Cycle Models

Bennett T. McCallum

NBER Working Paper No. 2480 (Also Reprint No. r1393)
Issued in 1988
NBER Program(s):   ME   EFG

This paper attempts to provide an evaluation of both strengths and weaknesses of the real business cycle (RBC) approach to the analysis of macroeconomic fluctuations. It begins with a description of the basic analytical structure typically employed, one in which individual households make consumption and labor supply decisions while producing output from capital and labor inputs, hired on competitive markets, according to a technology that is subject to stochastic shocks. It then explores conditions on parameter values that are needed for a model of this type to yield fluctuations that provide a good quantitative match to those observed in the postwar U.S. quarterly data. The plausibility of the hypothesis that (unobservable) aggregate technology shocks have the requisite variability is considered and problems with certain cross correlations are noted. Relevant evidence obtained by formal econometric methods is summarized and a few tentative conclusions regarding business cycle research are suggested.

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Document Object Identifier (DOI): 10.3386/w2480

Published: Modern Business Cycle Theory, edited by Robert J. Barro, pp. 16-50. Cambridge, MA: Harvard University Press, 1989.

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