Working Paper: NBER ID: w1933
Authors: Bennett T. McCallum
Abstract: This paper begins by identifying the distinguishing characteristic of the "real business cycle" (RBC) class of macroeconomic models. It then scruitinizes existing evidence, presented in support of the RBC approach, of three types: calibrated general equilibrium models with no monetary sector, vector-autoregression variance decomposition results, and univariate measurements of trend and cyclical components. It is argued that, in fact, these types of evidence have so far provided little support for the RBC hypothesis. Finally, with regard to an important alternative hypothesis concerning macroeconomic fluctuations, the paper proposes a partial rationalization for the stickiness of nominal product prices.
Keywords: business cycles; real business cycle; sticky prices; monetary policy
JEL Codes: E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary shocks (E39) | aggregate output (E10) |
| real shocks (F31) | aggregate output (E10) |
| aggregate output (E10) | monetary actions (E50) |
| RBC models deny monetary policy impact (E19) | output and employment (E23) |
| Kydland and Prescott model exclusion of monetary sector (E19) | output variability (C67) |
| Sims and Litterman & Weiss studies (G17) | output fluctuations (E39) |