NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Is Theory Really Ahead of Measurement? Current Real Business Cycle Theories and Aggregate Labor Market Fluctuations

Lawrence J. Christiano, Martin Eichenbaum

NBER Working Paper No. 2700
Issued in September 1988
NBER Program(s):   EFG

In the l93Os, Dunlop and Tarshis observed that the correlation between hours and wages is close to zero. This classic observation has become a litmus test by which macroeconomic models are judged. Existing real business cycle models fail this test dramatically. Based on this result, we argue that technology shocks cannot be the sole impulse driving post-war U.S. business cycles. We modify prototypical real business cycle models by allowing government spending shocks to influence labor market dynamics in a way suggested by Aschauer (1985), Barro (1981, 1987) and Kormendi (1983), This modification can, in principle, bring the models into closer conformity with the data. While the empirical performance of the models is significantly improved, they still fail to account for the Dunlop-Tarshis observation. Accounting for that observation will require further advances in model development. Consequently, we conclude that theory is behind, not ahead of, business cycle measurement.

download in pdf format
   (1058 K)

email paper

This paper is available as PDF (1058 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w2700

Published: American Economic Review Vol. 82, No. 3, pp. 430-450 June 1992

Users who downloaded this paper also downloaded these:
Gali and Rabanal Technology Shocks and Aggregate Fluctuations: How Well Does the Real Business Cycle Model Fit Postwar U.S. Data?
Mankiw w2882 Real Business Cycles: A New Keynesian Perspective
King and Plosser w0853 The Behavior of Money, Credit, and Prices in a Real Business Cycle
Stock and Watson Has the Business Cycle Changed and Why?
McCallum w2480 Real Business Cycle Models
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us