Working Paper: NBER ID: w4650
Authors: Julio J. Rotemberg; Michael Woodford
Abstract: We compute the forecastable changes in output, consumption, and hours implied by a VAR that includes the growth rate of private value added, the share of output that is consumed, and the detrended level of private hours. We show that the size of the forecastable changes in output greatly exceeds that predicted by a standard stochastic growth model, of the kind studied by real business cycle theorists. Contrary to the model's implications, forecastable movements in labor productivity are small and only weakly related to forecasted changes in output. Also, forecasted movements in investment and hours are positively correlated with forecasted movements in output. Finally, and again in contrast to what the growth model implies, forecasted output movements are positively related to the current level of the consumption share and negatively related to the level of hours. We also show that these contrasts between the model and the observations are robust to allowance for measurement error and a variety of other types of transitory disturbances.
Keywords: Business Cycle; Stochastic Growth; Economic Fluctuations
JEL Codes: E32; E37
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| current level of the consumption share (F62) | forecastable movements in output (E37) |
| forecasted movements in investment (F21) | forecasted movements in output (E37) |
| forecasted movements in hours (G17) | forecasted movements in output (E37) |
| predictable increases in labor input (J29) | predictable increases in output (E23) |
| forecasted movements in output (E37) | forecasted movements in labor productivity (O49) |