Working Paper: NBER ID: w7534
Authors: Robert G. King; Sergio T. Rebelo
Abstract: The Real Business Cycle (RBC) research program has grown spectacularly over the last decade, as its concepts and methods have diffused into mainstream macroeconomics. Yet, there is increasing skepticism that technology shocks are a major source of business fluctuations. This chapter exposits the basic RBC model and shows that it requires large technology shocks to produce realistic business cycles. While Solow residuals are sufficiently volatile, these imply frequent technological regress. Productivity studies permitting unobserved factor variation find much smaller technology shocks, suggesting the imminent demise of real business cycles. However, we show that greater factor variation also dramatically amplifies shocks: a RBC model with varying capital utilization yields realistic business cycles from small, nonnegative changes in technology.
Keywords: No keywords provided
JEL Codes: E10; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| technology shocks (D89) | business cycles (E32) |
| Solow residuals (C29) | technology shocks (D89) |
| greater factor variation (C29) | shocks (E32) |
| small, nonnegative changes in technology (O49) | realistic business cycles (E32) |
| varying capital utilization model (D29) | business cycles (E32) |