VI. Real Business Cycles Models

Size: px
Start display at page:

Download "VI. Real Business Cycles Models"

Transcription

1 VI. Real Business Cycles Models Introduction Business cycle research studies the causes and consequences of the recurrent expansions and contractions in aggregate economic activity that occur in most industrialized countries. Kydland and Prescott (1982) and Long and Plosser (1983) strikingly illustrated the promise of the application of rational expectations and general equilibrium analysis in business cycle research. Three revolutionary ideas in Kydland and Prescott (1982). Business cycles can be studied using Dynamic General Equilibrium models. It is possible to unify business cycle and growth theory by insisting that business cycle models should be consistent with the empirical regularities of long-run growth. We can quantitatively compare features of a model economy with stylized facts of real economy. Simple equilibrium models, when driven by shifts in total factor productivity, could generate time series with the same complex patterns of volatility, persistence and comovement as those of actual economies. Real business cycle analysis now occupies a major position in the core curriculum of nearly every graduate program. The methods of the RBC research program are now commonly applied, being used in work in monetary economics, international economics, public finance, labor economics, asset pricing and so on. 1

2 Data Detrending and Measuring Business Cycles Many real macroeconomic quantities grow overtime. (King and Rebelo (1999) Figure 1) Business Cycles: Those fluctuations in economic time series that have periodicity of eight years or less. For example, there are alternating periods of high and low output, but these episodes are of unequal duration and amplitude. To identify the business cycle properties of a series with a trend we must decompose the series in trend and cyclical components Detrending via log-linear regressions y t = y c t + y g t ln Y t = β 1 + β 2 t + e t y g t = ˆβ 1 + ˆβ 2 t An alternative log-linear regression y c t = ê t ln Y t = β 1 + β 2 t + β 3 t 2 + e t y g t = ˆβ 1 + ˆβ 2 t + ˆβ 3 t 2 Hodrick-Prescott Filter (HP filter) y c t = ê t the HP filter identifies a trend that fluctuates slightly overtime. specifically, the trend component (y g t ) is chosen to minimize a loss function: min {y g t } t=0 {(y t y g t ) 2 + λ[(y g t+1 y g t ) (y g t yt 1)] g 2 } t=1 as λ, the trend component approaches a linear trend; as λ 0, the trend coincides with the original series. 2

3 Business cycle statistics for the U.S. economy (King and Rebelo (1999) Table 1) Volatility consumption, wages, labour productivity, capital stock and TFP are less volatile than output; investment and capital utilization are more volatile than output; total hours worked and employment are about as volatile as output; hours per worker are much less volatile than output. Persistence First-order autocorrelations are large and positive. Cyclicality strongly procyclical: consumption, investment, total hours worked, labour productivity and TFP. Imports are more procyclical than exports. acyclical: wages, capital stock and government expenditures. countercyclical: real interest rate. Stylized Facts of Economic Growth Balanced Growth output grows at a (more or less) constant rate; capital grows faster than labour input; growth rates of output and capital stock are about the same; the rate of profit on capital has no trend. Other Facts the ratio of labour income to output has no trend; the ratio of investment to output has no trend; the ratio of consumption to output has a small (not statistically significant) positive trend. 3

4 Standard Real Business Cycles Model Keep the structure and assumptions of the neo-classical growth model. However, the parameter A in the production function is now a random variable (productivity shock). Y t = A t Kt α (N t γ t ) 1 α γ t : deterministic component of productivity A t : stochastic component of productivity Productivity shocks are stationary and follow an AR(1) process in logs ln A t+1 = ρ ln A t + ε t+1 0 < ρ < 1, ε t+1 iid(0, σ 2 ε) The competitive equilibrium is optimal in the standard RBC model. Therefore, we focus on a central planner s maximizing (under constraints) the expected lifetime utility of a representative household. max E 0 β t [ln C t + θ ln(1 N t )] t=0 subject to Ỹ t = A t Kα t N 1 α t C t + Ĩt = Ỹt γ K t+1 = (1 δ) K t + Ĩt ln A t+1 = ρ ln A t + ε t+1 0 < ρ < 1, ε t+1 iid(0, σ 2 ε) K 0 > 0 and A 0 > 0 given Unless δ = 1 and utility is logarithmic, this model cannot be solved analytically (except in steady state). 4

5 With 0 < δ < 1, numerical methods must be used to solve the model (e.g. linearization method of King, Plosser and Rebelo). The use of numerical methods requires numerical values for the parameters of the model calibration or estimation. Calibration Select parameter values based on microeconomic empirical studies and on long-run properties of the economy. There are broadly two parts of calibration. One must begin by choosing functional forms which imply that certain parameters are important and then one must assign parameter values. Labour income share in the model is 1 α. Labour income share in U.S. data is roughly 2/3. So α = 1/3. The mean of A affects only the scale of the economy, we normalize its unconditional mean to unity, A = 1. In the model, γ is the growth rate of Y (and X, C, I, K). We set γ = 1.004, the quarterly gross growth rate of per capita output in post-war U.S. data. The crucial assumption in RBC analysis is that the stochastic component of productivity can be extracted from the empirical Solow Residual (SR) measured as ln SR t = ln Y t (1 α) ln N t α ln K t If the theoretical model (the production function) is correct, ln SR t = ln A t + (1 α) ln(γ) t. Therefore, given values for α and γ, the productivity shocks are calculated as ln A t = ln SR t (1 α) ln(γ) t. 5

6 Given values for α and γ, we calculate ln A t = ln SR t (1 α) ln(γ) t and then estimate ln A t+1 = ρ ln A t + ε t+1 to obtain ˆρ = 0.979, ˆσ ε = With logarithmic periodic utility u( C t, N t ) = ln C t + θ ln(1 N t ) θ = 3.48 is selected to insure that steady-state hours worked equal The discount factor β is chosen so that the steady-state real interest rate equals the average return to capital in the post-war U.S. data. In steady state, the capital Euler equation implies β = γ 1 + r k δ = / Capital depreciation rate δ = is chosen so that the capital-output ratio is approximately 10 in the model s steady state: K Y = 10. Predictions of the Standard RBC Model King and Rebelo (1999) Figure 7 compares historical and simulated paths for the U.S. economy. Looking at Figure 7, we can see that the basic RBC model gives quite a good account of the quarter-to-quarter variation in the output time series. Turning to the individual components of output, the performance of the RBC model is also surprisingly good for such a simple model. One way of evaluating the predictions of the basic RBC model is to compare moments that summarize the actual experience of an economy with similar moments from the model. Therefore, we compare Tables 1 and 3 in King and Rebelo (1999). 6

7 From the comparison, we can see that the RBC model produces a surprisingly good account of US economic activity. However, there are also evident discrepancies. Internal propagation of shocks is weak in the standard RBC model. Autocorrelation Model Data Prod. Shocks (A) Output (Y ) Impulse response functions (IRFs): King and Rebelo (1999) Figures 9 and 10. Main Criticisms of the RBC Model I. Labour Market A few statistics 1. corr(w, Y ) is too high; 2. corr(w, N) is too high; 3. var(n)/var(w) is too small; 4. In the model, the labour supply elasticity is much larger than in the data. The labour market in the standard RBC model labour demand comes from firm s FONCs w t = (1 α) A t K α t N α t N d t = [ (1 α) A t K α t w t ] 1 α labour supply comes from the representative household s FONCs w t = (graphical representation) θ C t 1 N t N s t = 1 θ C t w t 7

8 II. Productivity Shocks 1. It is hard to identify the macro shocks that produce the productivity variations suggested by the Solow residuals. 2. Solow residuals often decline suggesting that recessions are caused by technological regress. 3. Measurement problems: Solow residual based measures of shocks that do not account for unmeasured variations in labor and capital will tend to be more volatile and procyclical than true shocks to technology. For example, if we take into account variable labor effort (e t ) and variable capital utilization rates (z t ), Y t = A t (z t K t ) α (e t N t X t ) 1 α ln Y t α ln K t (1 α) ln N t = ln A t + (1 α) ln X t + α ln z t + (1 α) ln e t ln SR t = ln NSR t + α ln z t + (1 α) ln e t. Thus, Solow residual (SR t ) is overestimated. 8

9 Table 1 of King and Rebelo (1999) Business Cycle Statistics for the U.S. Economy SD SD/SD(Y ) Autocor. Cor. with Y Y C I N Y/N w r A SD: Standard Deviation; SD/SD(Y ): Standard Deviation relative to Output; Autocor.: First-Order Autocorrelation; Cor. with Y : Contemporaneous Correlation with Output. 2. Y : output per capita; C: consumption per capita; I: investment per capita; N hours worked per capita; w: real wage (compensation per hour); r: real interest rate; A: total factor productivity. 3. All variables are in logarithms (with the exception of the real interest rate) and have been detrended with the HP filter. Data sources are described in Stock and Watson (1998), who created the real rate using VAR inflation expectations. Table 3 of King and Rebelo (1999) Business Cycle Statistics for Basic RBC Model SD SD/SD(Y ) Autocor. Cor. with Y Y C I N Y/N w r A Note: All variables have been logged (with the exception of the real interest rate) and detrended with the HP filter. 9

2. Real Business Cycle Theory (June 25, 2013)

2. Real Business Cycle Theory (June 25, 2013) Prof. Dr. Thomas Steger Advanced Macroeconomics II Lecture SS 13 2. Real Business Cycle Theory (June 25, 2013) Introduction Simplistic RBC Model Simple stochastic growth model Baseline RBC model Introduction

More information

Real Business Cycle Models

Real Business Cycle Models Real Business Cycle Models Lecture 2 Nicola Viegi April 2015 Basic RBC Model Claim: Stochastic General Equlibrium Model Is Enough to Explain The Business cycle Behaviour of the Economy Money is of little

More information

The RBC methodology also comes down to two principles:

The RBC methodology also comes down to two principles: Chapter 5 Real business cycles 5.1 Real business cycles The most well known paper in the Real Business Cycles (RBC) literature is Kydland and Prescott (1982). That paper introduces both a specific theory

More information

Lecture 14 More on Real Business Cycles. Noah Williams

Lecture 14 More on Real Business Cycles. Noah Williams Lecture 14 More on Real Business Cycles Noah Williams University of Wisconsin - Madison Economics 312 Optimality Conditions Euler equation under uncertainty: u C (C t, 1 N t) = βe t [u C (C t+1, 1 N t+1)

More information

3 The Standard Real Business Cycle (RBC) Model. Optimal growth model + Labor decisions

3 The Standard Real Business Cycle (RBC) Model. Optimal growth model + Labor decisions Franck Portier TSE Macro II 29-21 Chapter 3 Real Business Cycles 36 3 The Standard Real Business Cycle (RBC) Model Perfectly competitive economy Optimal growth model + Labor decisions 2 types of agents

More information

Real Business Cycle Models

Real Business Cycle Models Phd Macro, 2007 (Karl Whelan) 1 Real Business Cycle Models The Real Business Cycle (RBC) model introduced in a famous 1982 paper by Finn Kydland and Edward Prescott is the original DSGE model. 1 The early

More information

Topic 5: Stochastic Growth and Real Business Cycles

Topic 5: Stochastic Growth and Real Business Cycles Topic 5: Stochastic Growth and Real Business Cycles Yulei Luo SEF of HKU October 1, 2015 Luo, Y. (SEF of HKU) Macro Theory October 1, 2015 1 / 45 Lag Operators The lag operator (L) is de ned as Similar

More information

Real Business Cycles. Federal Reserve Bank of Minneapolis Research Department Staff Report 370. February 2006. Ellen R. McGrattan

Real Business Cycles. Federal Reserve Bank of Minneapolis Research Department Staff Report 370. February 2006. Ellen R. McGrattan Federal Reserve Bank of Minneapolis Research Department Staff Report 370 February 2006 Real Business Cycles Ellen R. McGrattan Federal Reserve Bank of Minneapolis and University of Minnesota Abstract:

More information

MA Advanced Macroeconomics: 7. The Real Business Cycle Model

MA Advanced Macroeconomics: 7. The Real Business Cycle Model MA Advanced Macroeconomics: 7. The Real Business Cycle Model Karl Whelan School of Economics, UCD Spring 2015 Karl Whelan (UCD) Real Business Cycles Spring 2015 1 / 38 Working Through A DSGE Model We have

More information

Real Business Cycle Theory

Real Business Cycle Theory Real Business Cycle Theory Guido Ascari University of Pavia () Real Business Cycle Theory 1 / 50 Outline Introduction: Lucas methodological proposal The application to the analysis of business cycle uctuations:

More information

Business Cycles, Theory and Empirical Applications

Business Cycles, Theory and Empirical Applications Business Cycles, Theory and Empirical Applications Seminar Presentation Country of interest France Jan Krzyzanowski June 9, 2012 Table of Contents Business Cycle Analysis Data Quantitative Analysis Stochastic

More information

REAL BUSINESS CYCLE THEORY METHODOLOGY AND TOOLS

REAL BUSINESS CYCLE THEORY METHODOLOGY AND TOOLS Jakub Gazda 42 Jakub Gazda, Real Business Cycle Theory Methodology and Tools, Economics & Sociology, Vol. 3, No 1, 2010, pp. 42-48. Jakub Gazda Department of Microeconomics Poznan University of Economics

More information

Intermediate Macroeconomics: The Real Business Cycle Model

Intermediate Macroeconomics: The Real Business Cycle Model Intermediate Macroeconomics: The Real Business Cycle Model Eric Sims University of Notre Dame Fall 2012 1 Introduction Having developed an operational model of the economy, we want to ask ourselves the

More information

Advanced Macroeconomics (2)

Advanced Macroeconomics (2) Advanced Macroeconomics (2) Real-Business-Cycle Theory Alessio Moneta Institute of Economics Scuola Superiore Sant Anna, Pisa amoneta@sssup.it March-April 2015 LM in Economics Scuola Superiore Sant Anna

More information

Why Does Consumption Lead the Business Cycle?

Why Does Consumption Lead the Business Cycle? Why Does Consumption Lead the Business Cycle? Yi Wen Department of Economics Cornell University, Ithaca, N.Y. yw57@cornell.edu Abstract Consumption in the US leads output at the business cycle frequency.

More information

The Real Business Cycle Model

The Real Business Cycle Model The Real Business Cycle Model Ester Faia Goethe University Frankfurt Nov 2015 Ester Faia (Goethe University Frankfurt) RBC Nov 2015 1 / 27 Introduction The RBC model explains the co-movements in the uctuations

More information

The real business cycle theory

The real business cycle theory Chapter 29 The real business cycle theory Since the middle of the 1970s two quite different approaches to the explanation of business cycle fluctuations have been pursued. We may broadly classify them

More information

Dynamic Macroeconomics I Introduction to Real Business Cycle Theory

Dynamic Macroeconomics I Introduction to Real Business Cycle Theory Dynamic Macroeconomics I Introduction to Real Business Cycle Theory Lorenza Rossi University of Pavia these slides are based on my Course of Advanced Macroeconomics II held at UPF and bene t of the work

More information

Real Business Cycle Theory. Marco Di Pietro Advanced () Monetary Economics and Policy 1 / 35

Real Business Cycle Theory. Marco Di Pietro Advanced () Monetary Economics and Policy 1 / 35 Real Business Cycle Theory Marco Di Pietro Advanced () Monetary Economics and Policy 1 / 35 Introduction to DSGE models Dynamic Stochastic General Equilibrium (DSGE) models have become the main tool for

More information

ECON 5010 Class Notes Business Cycles and the Environment

ECON 5010 Class Notes Business Cycles and the Environment ECON 5010 Class Notes Business Cycles and the Environment Here, I outline a forthcoming paper by Garth Heutel in the Review of Economic Dynamics. The title is "How Should Environmental Policy Respond to

More information

DEPARTMENT OF ECONOMICS WORKING PAPER SERIES

DEPARTMENT OF ECONOMICS WORKING PAPER SERIES DEPARTMENT OF ECONOMICS WORKING PAPER SERIES 2008-02 McMASTER UNIVERSITY Department of Economics Kenneth Taylor Hall 426 1280 Main Street West Hamilton, Ontario, Canada L8S 4M4 http://www.mcmaster.ca/economics/

More information

Real Business Cycle Theory

Real Business Cycle Theory Chapter 4 Real Business Cycle Theory This section of the textbook focuses on explaining the behavior of the business cycle. The terms business cycle, short-run macroeconomics, and economic fluctuations

More information

ECON20310 LECTURE SYNOPSIS REAL BUSINESS CYCLE

ECON20310 LECTURE SYNOPSIS REAL BUSINESS CYCLE ECON20310 LECTURE SYNOPSIS REAL BUSINESS CYCLE YUAN TIAN This synopsis is designed merely for keep a record of the materials covered in lectures. Please refer to your own lecture notes for all proofs.

More information

Graduate Macro Theory II: The Real Business Cycle Model

Graduate Macro Theory II: The Real Business Cycle Model Graduate Macro Theory II: The Real Business Cycle Model Eric Sims University of Notre Dame Spring 2011 1 Introduction This note describes the canonical real business cycle model. A couple of classic references

More information

Towards a Structuralist Interpretation of Saving, Investment and Current Account in Turkey

Towards a Structuralist Interpretation of Saving, Investment and Current Account in Turkey Towards a Structuralist Interpretation of Saving, Investment and Current Account in Turkey MURAT ÜNGÖR Central Bank of the Republic of Turkey http://www.muratungor.com/ April 2012 We live in the age of

More information

Great Depressions from a Neoclassical Perspective. Advanced Macroeconomic Theory

Great Depressions from a Neoclassical Perspective. Advanced Macroeconomic Theory Great Depressions from a Neoclassical Perspective Advanced Macroeconomic Theory 1 Review of Last Class Model with indivisible labor, either working for xed hours or not. allow social planner to choose

More information

Sovereign Defaults. Iskander Karibzhanov. October 14, 2014

Sovereign Defaults. Iskander Karibzhanov. October 14, 2014 Sovereign Defaults Iskander Karibzhanov October 14, 214 1 Motivation Two recent papers advance frontiers of sovereign default modeling. First, Aguiar and Gopinath (26) highlight the importance of fluctuations

More information

A Review of the Literature of Real Business Cycle theory. By Student E XXXXXXX

A Review of the Literature of Real Business Cycle theory. By Student E XXXXXXX A Review of the Literature of Real Business Cycle theory By Student E XXXXXXX Abstract: The following paper reviews five articles concerning Real Business Cycle theory. First, the review compares the various

More information

Macroeconomic Effects of Financial Shocks Online Appendix

Macroeconomic Effects of Financial Shocks Online Appendix Macroeconomic Effects of Financial Shocks Online Appendix By Urban Jermann and Vincenzo Quadrini Data sources Financial data is from the Flow of Funds Accounts of the Federal Reserve Board. We report the

More information

Agenda. Business Cycles. What Is a Business Cycle? What Is a Business Cycle? What is a Business Cycle? Business Cycle Facts.

Agenda. Business Cycles. What Is a Business Cycle? What Is a Business Cycle? What is a Business Cycle? Business Cycle Facts. Agenda What is a Business Cycle? Business Cycles.. 11-1 11-2 Business cycles are the short-run fluctuations in aggregate economic activity around its long-run growth path. Y Time 11-3 11-4 1 Components

More information

1 National Income and Product Accounts

1 National Income and Product Accounts Espen Henriksen econ249 UCSB 1 National Income and Product Accounts 11 Gross Domestic Product (GDP) Can be measured in three different but equivalent ways: 1 Production Approach 2 Expenditure Approach

More information

Working Capital Requirement and the Unemployment Volatility Puzzle

Working Capital Requirement and the Unemployment Volatility Puzzle Working Capital Requirement and the Unemployment Volatility Puzzle Tsu-ting Tim Lin Gettysburg College July, 3 Abstract Shimer (5) argues that a search-and-matching model of the labor market in which wage

More information

Foundations of Modern Macroeconomics Second Edition

Foundations of Modern Macroeconomics Second Edition Foundations of Modern Macroeconomics Second Edition Chapter 15: Real business cycles Ben J. Heijdra Department of Economics & Econometrics University of Groningen 1 September 29 Foundations of Modern Macroeconomics

More information

Graduate Macroeconomics 2

Graduate Macroeconomics 2 Graduate Macroeconomics 2 Lecture 1 - Introduction to Real Business Cycles Zsófia L. Bárány Sciences Po 2014 January About the course I. 2-hour lecture every week, Tuesdays from 10:15-12:15 2 big topics

More information

7. Real business cycle

7. Real business cycle 7. Real business cycle We have argued that a change in fundamentals, modifies the long-run solution of the system, while a temporary change not permanently affecting fundamentals leads to a short-run dynamics

More information

Cash in advance model

Cash in advance model Chapter 4 Cash in advance model 4.1 Motivation In this lecture we will look at ways of introducing money into a neoclassical model and how these methods can be developed in an effort to try and explain

More information

The Real Business Cycle model

The Real Business Cycle model The Real Business Cycle model Spring 2013 1 Historical introduction Modern business cycle theory really got started with Great Depression Keynes: The General Theory of Employment, Interest and Money Keynesian

More information

1 A simple two period model

1 A simple two period model A QUICK REVIEW TO INTERTEMPORAL MAXIMIZATION PROBLEMS 1 A simple two period model 1.1 The intertemporal problem The intertemporal consumption decision can be analyzed in a way very similar to an atemporal

More information

The Real Business Cycle School

The Real Business Cycle School Major Currents in Contemporary Economics The Real Business Cycle School Mariusz Próchniak Department of Economics II Warsaw School of Economics 1 Background During 1972-82,the dominant new classical theory

More information

A Progress Report on Business Cycle Models

A Progress Report on Business Cycle Models Federal Reserve Bank of Minneapolis Quarterly Review Vol. 18, No. 4, Fall 1994 A Progress Report on Business Cycle Models Ellen R. McGrattan* Economist Research Department Federal Reserve Bank of Minneapolis

More information

UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS

UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS Exam: ECON4310 Intertemporal macroeconomics Date of exam: Thursday, November 27, 2008 Grades are given: December 19, 2008 Time for exam: 09:00 a.m. 12:00 noon

More information

DECONSTRUCTING THE SUCCESS OF REAL BUSINESS CYCLES

DECONSTRUCTING THE SUCCESS OF REAL BUSINESS CYCLES DECONSTRUCTING THE SUCCESS OF REAL BUSINESS CYCLES EMI NAKAMURA* The empirical success of Real Business Cycle (RBC) models is often judged by their ability to explain the behavior of a multitude of real

More information

Real Business Cycle Theory

Real Business Cycle Theory Real Business Cycle Theory Barbara Annicchiarico Università degli Studi di Roma "Tor Vergata" April 202 General Features I Theory of uctuations (persistence, output does not show a strong tendency to return

More information

Interest Rates and Real Business Cycles in Emerging Markets

Interest Rates and Real Business Cycles in Emerging Markets CENTRAL BANK OF THE REPUBLIC OF TURKEY WORKING PAPER NO: 0/08 Interest Rates and Real Business Cycles in Emerging Markets May 200 S. Tolga TİRYAKİ Central Bank of the Republic of Turkey 200 Address: Central

More information

Real Business Cycle Theory-A Systematic Review

Real Business Cycle Theory-A Systematic Review MPRA Munich Personal RePEc Archive Real Business Cycle Theory-A Systematic Review Binbin Deng Department of Economics, Hong Kong University of Science and Technology 27. July 2009 Online at http://mpra.ub.uni-muenchen.de/17932/

More information

Ifo Institute for Economic Research at the University of Munich. 6. The New Keynesian Model

Ifo Institute for Economic Research at the University of Munich. 6. The New Keynesian Model 6. The New Keynesian Model 1 6.1 The Baseline Model 2 Basic Concepts of the New Keynesian Model Markets are imperfect: Price and wage adjustments: contract duration, adjustment costs, imperfect expectations

More information

Summing up ECON4310 Lecture. Asbjørn Rødseth. University of Oslo 27/

Summing up ECON4310 Lecture. Asbjørn Rødseth. University of Oslo 27/ Summing up 4310 ECON4310 Lecture Asbjørn Rødseth University of Oslo 27/11 2013 Asbjørn Rødseth (University of Oslo) Summing up 4310 27/11 2013 1 / 20 Agenda Solow, Ramsey and Diamond Real Business Cycle

More information

THE 1970S saw a distinctive shift in

THE 1970S saw a distinctive shift in Journal of Economics Literatute Vol. XXXII (December 1994), pp. 1750 1783 Real Business Cycles Stadler: Real Business Cycles By GEORGE W. STADLER University of Newcastle upon Tyne I have received numerous

More information

Advanced Macroeconomics (ECON 402) Lecture 8 Real Business Cycle Theory

Advanced Macroeconomics (ECON 402) Lecture 8 Real Business Cycle Theory Advanced Macroeconomics (ECON 402) Lecture 8 Real Business Cycle Theory Teng Wah Leo Some Stylized Facts Regarding Economic Fluctuations Having now understood various growth models, we will now delve into

More information

7 STOCHASTIC GROWTH MODELS AND REAL BUSINESS CYCLES

7 STOCHASTIC GROWTH MODELS AND REAL BUSINESS CYCLES Economics 314 Coursebook, 2010 Jeffrey Parker 7 STOCHASTIC GROWTH MODELS AND REAL BUSINESS CYCLES Chapter 7 Contents A. Topics and Tools... 1 B. Walrasian vs. Keynesian Explanations of Business Cycles...

More information

Chapter 6. Econometrics. 6.1 Introduction. 6.2 Univariate techniques Transforming data

Chapter 6. Econometrics. 6.1 Introduction. 6.2 Univariate techniques Transforming data Chapter 6 Econometrics 6.1 Introduction We re going to use a few tools to characterize the time series properties of macro variables. Today, we will take a relatively atheoretical approach to this task,

More information

Cyclical behavior of real wages in Japan

Cyclical behavior of real wages in Japan Social Design Engineering Series SDES-2014-16 Cyclical behavior of real wages in Japan Hiroaki Miyamoto University of Tokyo 25th November, 2014 School of Economics and Management Research Center for Social

More information

Is the Technology-Driven Real Business Cycle Hypothesis Dead? Shocks and Aggregate Fluctuations Revisited

Is the Technology-Driven Real Business Cycle Hypothesis Dead? Shocks and Aggregate Fluctuations Revisited Is the Technology-Driven Real Business Cycle Hypothesis Dead? Shocks and Aggregate Fluctuations Revisited by Neville Francis Lehigh University and Valerie A. Ramey University of California, San Diego and

More information

Financial Development and Macroeconomic Stability

Financial Development and Macroeconomic Stability Financial Development and Macroeconomic Stability Vincenzo Quadrini University of Southern California Urban Jermann Wharton School of the University of Pennsylvania January 31, 2005 VERY PRELIMINARY AND

More information

Macroeconomics Lecture 1: The Solow Growth Model

Macroeconomics Lecture 1: The Solow Growth Model Macroeconomics Lecture 1: The Solow Growth Model Richard G. Pierse 1 Introduction One of the most important long-run issues in macroeconomics is understanding growth. Why do economies grow and what determines

More information

A Macroeconomic Approach to Optimal Unemployment Insurance: Theory and Applications

A Macroeconomic Approach to Optimal Unemployment Insurance: Theory and Applications A Macroeconomic Approach to Optimal Unemployment Insurance: Theory and Applications Landais (LSE), Michaillat (LSE), and Saez (Berkeley) December 2015 1 / 55 Baily-Chetty theory of optimal UI insurance-incentive

More information

Chapter 11. Market-Clearing Models of the Business Cycle

Chapter 11. Market-Clearing Models of the Business Cycle Chapter 11 Market-Clearing Models of the Business Cycle Goal of This Chapter In this chapter, we study three models of business cycle, which were each developed as explicit equilibrium (market-clearing)

More information

GENERAL EQUILIBRIUM WITH BANKS AND THE FACTOR-INTENSITY CONDITION

GENERAL EQUILIBRIUM WITH BANKS AND THE FACTOR-INTENSITY CONDITION GENERAL EQUILIBRIUM WITH BANKS AND THE FACTOR-INTENSITY CONDITION Emanuel R. Leão Pedro R. Leão Junho 2008 WP nº 2008/63 DOCUMENTO DE TRABALHO WORKING PAPER General Equilibrium with Banks and the Factor-Intensity

More information

Indeterminacy, Aggregate Demand, and the Real Business Cycle

Indeterminacy, Aggregate Demand, and the Real Business Cycle Indeterminacy, Aggregate Demand, and the Real Business Cycle Jess Benhabib Department of Economics New York University jess.benhabib@nyu.edu Yi Wen Department of Economics Cornell University Yw57@cornell.edu

More information

Chapter 8 Business Cycles

Chapter 8 Business Cycles Chapter 8 Business Cycles Multiple Choice Questions 1. One of the first organizations to investigate the business cycle was (a) the Federal Reserve System. (b) the National Bureau of Economic Research.

More information

Conditional guidance as a response to supply uncertainty

Conditional guidance as a response to supply uncertainty 1 Conditional guidance as a response to supply uncertainty Appendix to the speech given by Ben Broadbent, External Member of the Monetary Policy Committee, Bank of England At the London Business School,

More information

WORKING PAPER SERIES

WORKING PAPER SERIES DEPARTMENT OF ECONOMICS UNIVERSITY OF MILAN - BICOCCA WORKING PAPER SERIES Real Business Cycles with Cournot Competition and Endogenous Entry Andrea Colciago, Federico Etro No. 35 February 28 Dipartimento

More information

University of Saskatchewan Department of Economics Economics 414.3 Homework #1

University of Saskatchewan Department of Economics Economics 414.3 Homework #1 Homework #1 1. In 1900 GDP per capita in Japan (measured in 2000 dollars) was $1,433. In 2000 it was $26,375. (a) Calculate the growth rate of income per capita in Japan over this century. (b) Now suppose

More information

Lecture 3: Growth with Overlapping Generations (Acemoglu 2009, Chapter 9, adapted from Zilibotti)

Lecture 3: Growth with Overlapping Generations (Acemoglu 2009, Chapter 9, adapted from Zilibotti) Lecture 3: Growth with Overlapping Generations (Acemoglu 2009, Chapter 9, adapted from Zilibotti) Kjetil Storesletten September 10, 2013 Kjetil Storesletten () Lecture 3 September 10, 2013 1 / 44 Growth

More information

A Classical Monetary Model - Money in the Utility Function

A Classical Monetary Model - Money in the Utility Function A Classical Monetary Model - Money in the Utility Function Jarek Hurnik Department of Economics Lecture III Jarek Hurnik (Department of Economics) Monetary Economics 2012 1 / 24 Basic Facts So far, the

More information

An Introduction to Time Series Regression

An Introduction to Time Series Regression An Introduction to Time Series Regression Henry Thompson Auburn University An economic model suggests examining the effect of exogenous x t on endogenous y t with an exogenous control variable z t. In

More information

Inventories and the Role of Goods-Market Frictions for Business Cycles

Inventories and the Role of Goods-Market Frictions for Business Cycles Inventories and the Role of Goods-Market Frictions for Business Cycles Wouter J. Den Haan November 29, 2013 Abstract Changes in the stock of inventories are important for fluctuations in aggregate output.

More information

Existence of J-Curve between Thailand and ASEAN: A Real Business Cycle Perspective

Existence of J-Curve between Thailand and ASEAN: A Real Business Cycle Perspective DOI: 1.7763/IPEDR. 214. V76. 6 Existence of J-Curve between Thailand and ASEAN: A Real Business Cycle Perspective Jirawat Jaroensathapornkul 1 2 School of Economics and Public Policy, Srinakharinwirot

More information

Graduate Macro Theory II: Notes on Using Dynare

Graduate Macro Theory II: Notes on Using Dynare Graduate Macro Theory II: Notes on Using Dynare Eric Sims University of Notre Dame Spring 011 1 Introduction This document will present some simple examples of how to solve, simulate, and estimate DSGE

More information

Total Factor Productivity

Total Factor Productivity Total Factor Productivity Diego Comin NewYorkUniversityandNBER August 2006 Abstract Total Factor Productivity (TFP) is the portion of output not explained by the amount of inputs used in production. The

More information

Estimating baseline real business cycle models of the Australian economy

Estimating baseline real business cycle models of the Australian economy Estimating baseline real business cycle models of the Australian economy Don Harding and Siwage Negara y University of Melbourne February 26, 2008 1 Introduction This paper is concerned with the issues

More information

VII. ECONOMIC FLUCTUATIONS AND MACROECONOMIC POLICY

VII. ECONOMIC FLUCTUATIONS AND MACROECONOMIC POLICY VII. ECONOMIC FLUCTUATIONS AND MACROECONOMIC POLICY A. Aggregate Demand and Prices 1. The aggregate demand/inflation (ADI) curve -- graphical representation of the negative relationship (downward sloping

More information

Equilibrium Unemployment Theory

Equilibrium Unemployment Theory Equilibrium Unemployment Theory Model Modifications Matthias S. Hertweck University of Basel March 26, 2012 Matthias S. Hertweck Equilibrium Unemployment Theory 1/38 Lecture Outline The Volatility Puzzle

More information

ECON 5110 Class Notes Overview of New Keynesian Economics

ECON 5110 Class Notes Overview of New Keynesian Economics ECON 5110 Class Notes Overview of New Keynesian Economics 1 Introduction The primary distinction between Keynesian and classical macroeconomics is the flexibility of prices and wages. In classical models

More information

Lecture 2 Dynamic Equilibrium Models : Finite Periods

Lecture 2 Dynamic Equilibrium Models : Finite Periods Lecture 2 Dynamic Equilibrium Models : Finite Periods 1. Introduction In macroeconomics, we study the behavior of economy-wide aggregates e.g. GDP, savings, investment, employment and so on - and their

More information

RESUSCITATING REAL BUSINESS CYCLES *

RESUSCITATING REAL BUSINESS CYCLES * Chapter 14 RESUSCITATING REAL BUSINESS CYCLES * ROBERT G. KING University of Virginia and NBER SERGIO T. REBELO Northwestern University and NBER Contents Abstract 928 Keywords 928 1. Introduction 929 2.

More information

Financial Shocks, Cyclicality of Labor Productivity and the Great Moderation

Financial Shocks, Cyclicality of Labor Productivity and the Great Moderation Financial Shocks, Cyclicality of Labor Productivity and the Great Moderation October 28, 2014 Abstract The nature of the business cycle has sharply changed since the onset of great moderation with decline

More information

The Solow Model. Savings and Leakages from Per Capita Capital. (n+d)k. sk^alpha. k*: steady state 0 1 2.22 3 4. Per Capita Capital, k

The Solow Model. Savings and Leakages from Per Capita Capital. (n+d)k. sk^alpha. k*: steady state 0 1 2.22 3 4. Per Capita Capital, k Savings and Leakages from Per Capita Capital 0.1.2.3.4.5 The Solow Model (n+d)k sk^alpha k*: steady state 0 1 2.22 3 4 Per Capita Capital, k Pop. growth and depreciation Savings In the diagram... sy =

More information

Not All Oil Price Shocks Are Alike: A Neoclassical Perspective

Not All Oil Price Shocks Are Alike: A Neoclassical Perspective Not All Oil Price Shocks Are Alike: A Neoclassical Perspective Vipin Arora U.S. Energy Information Administration Junsang Lee SungKyunKwan University Pedro Gomis-Porqueras DeakinUniversity Abstract This

More information

CHAPTER 11. AN OVEVIEW OF THE BANK OF ENGLAND QUARTERLY MODEL OF THE (BEQM)

CHAPTER 11. AN OVEVIEW OF THE BANK OF ENGLAND QUARTERLY MODEL OF THE (BEQM) 1 CHAPTER 11. AN OVEVIEW OF THE BANK OF ENGLAND QUARTERLY MODEL OF THE (BEQM) This model is the main tool in the suite of models employed by the staff and the Monetary Policy Committee (MPC) in the construction

More information

The Golden Rule. Where investment I is equal to the savings rate s times total production Y: So consumption per worker C/L is equal to:

The Golden Rule. Where investment I is equal to the savings rate s times total production Y: So consumption per worker C/L is equal to: The Golden Rule Choosing a National Savings Rate What can we say about economic policy and long-run growth? To keep matters simple, let us assume that the government can by proper fiscal and monetary policies

More information

INSTITUT FÜR WIRTSCHAFTSPOLITIK AN DER UNIVERSITÄT ZU KÖLN

INSTITUT FÜR WIRTSCHAFTSPOLITIK AN DER UNIVERSITÄT ZU KÖLN INSTITUT FÜR WIRTSCHAFTSPOLITIK AN DER UNIVERSITÄT ZU KÖLN Germany and the European Business Cycle An Analysis of Causal Relations in an International Real Business Cycle Model by Ferdinand Fichtner IWP

More information

Economic Growth: Malthus and Solow

Economic Growth: Malthus and Solow Economic Growth: Malthus and Solow Economics 3307 - Intermediate Macroeconomics Aaron Hedlund Baylor University Fall 2013 Econ 3307 (Baylor University) Malthus and Solow Fall 2013 1 / 35 Introduction Two

More information

Macroeconomics of the Labor Market

Macroeconomics of the Labor Market Macroeconomics of the Labor Market By Christian Merkl CES-Lecture 1: Stylized Facts of the Labor Market Munich, August 2013 Outline 1 Labor markets and the business cycle 1. Stylized facts Descriptive

More information

Economic Growth. (c) Copyright 1999 by Douglas H. Joines 1

Economic Growth. (c) Copyright 1999 by Douglas H. Joines 1 Economic Growth (c) Copyright 1999 by Douglas H. Joines 1 Module Objectives Know what determines the growth rates of aggregate and per capita GDP Distinguish factors that affect the economy s growth rate

More information

Final. 1. (2 pts) What is the expected effect on the real demand for money of an increase in the nominal interest rate? How to explain this effect?

Final. 1. (2 pts) What is the expected effect on the real demand for money of an increase in the nominal interest rate? How to explain this effect? Name: Number: Nova School of Business and Economics Macroeconomics, 1103-1st Semester 2013-2014 Prof. André C. Silva TAs: João Vaz, Paulo Fagandini, and Pedro Freitas Final Maximum points: 20. Time: 2h.

More information

INVESTMENT PLANNING COSTS AND THE EFFECTS OF FISCAL AND MONETARY POLICY. Susanto Basu and Miles S. Kimball. University of Michigan and NBER

INVESTMENT PLANNING COSTS AND THE EFFECTS OF FISCAL AND MONETARY POLICY. Susanto Basu and Miles S. Kimball. University of Michigan and NBER INVESTMENT PLANNING COSTS AND THE EFFECTS OF FISCAL AND MONETARY POLICY Susanto Basu and Miles S. Kimball University of Michigan and NBER MAIN RESULTS. Show that a model with capital accumulation and sticky

More information

Real Business Cycles in Emerging Countries?

Real Business Cycles in Emerging Countries? Real Business Cycles in Emerging Countries? Javier García-Cicco Central Bank of Chile Roberto Pancrazi Duke University Martín Uribe Columbia University and NBER September 17, 2009 Abstract We use more

More information

Discussion of Capital Injection, Monetary Policy, and Financial Accelerators

Discussion of Capital Injection, Monetary Policy, and Financial Accelerators Discussion of Capital Injection, Monetary Policy, and Financial Accelerators Karl Walentin Sveriges Riksbank 1. Background This paper is part of the large literature that takes as its starting point the

More information

welfare costs of business cycles

welfare costs of business cycles welfare costs of business cycles Ayse Imrohoroglu From The New Palgrave Dictionary of Economics, Second Edition, 2008 Edited by Steven N. Durlauf and Lawrence E. Blume Abstract The welfare cost of business

More information

Preparation course MSc Business&Econonomics: Economic Growth

Preparation course MSc Business&Econonomics: Economic Growth Preparation course MSc Business&Econonomics: Economic Growth Tom-Reiel Heggedal Economics Department 2014 TRH (Institute) Solow model 2014 1 / 27 Theory and models Objective of this lecture: learn Solow

More information

Endogenous Growth Theory

Endogenous Growth Theory Chapter 3 Endogenous Growth Theory 3.1 One-Sector Endogenous Growth Models 3.2 Two-sector Endogenous Growth Model 3.3 Technological Change: Horizontal Innovations References: Aghion, P./ Howitt, P. (1992),

More information

Labor Market Search and Real Business Cycles: Reconciling Nash Bargaining with the Real Wage Dynamics

Labor Market Search and Real Business Cycles: Reconciling Nash Bargaining with the Real Wage Dynamics Labor Market Search and Real Business Cycles: Reconciling Nash Bargaining with the Real Wage Dynamics A. CHERON F. LANGOT CEPREMAP CEPREMAP GAINS-Université du Maine GAINS-Université du Maine acheron@univ-lemans.fr

More information

Chapter 1. Vector autoregressions. 1.1 VARs and the identi cation problem

Chapter 1. Vector autoregressions. 1.1 VARs and the identi cation problem Chapter Vector autoregressions We begin by taking a look at the data of macroeconomics. A way to summarize the dynamics of macroeconomic data is to make use of vector autoregressions. VAR models have become

More information

Business cycles and natural gas prices

Business cycles and natural gas prices Business cycles and natural gas prices Apostolos Serletis and Asghar Shahmoradi Abstract This paper investigates the basic stylised facts of natural gas price movements using data for the period that natural

More information

New Keynesian model. Marcin Kolasa. Warsaw School of Economics Department of Quantitative Economics. Marcin Kolasa (WSE) NK model 1 / 36

New Keynesian model. Marcin Kolasa. Warsaw School of Economics Department of Quantitative Economics. Marcin Kolasa (WSE) NK model 1 / 36 New Keynesian model Marcin Kolasa Warsaw School of Economics Department of Quantitative Economics Marcin Kolasa (WSE) NK model 1 / 36 Flexible vs. sticky prices Central assumption in the (neo)classical

More information

Testing Real Business Cycle Models in an Emerging Economy

Testing Real Business Cycle Models in an Emerging Economy Draft For comments only Testing Real Business Cycle Models in an Emerging Economy Raphael Bergoeing* Raimundo Soto** June 15, 2000 * Ilades-Georgetown University ** Banco Central de Chile and Ilades-Georgetown

More information

Economic Growth: Theory and Empirics (2012) Problem set I

Economic Growth: Theory and Empirics (2012) Problem set I Economic Growth: Theory and Empirics (2012) Problem set I Due date: April 27, 2012 Problem 1 Consider a Solow model with given saving/investment rate s. Assume: Y t = K α t (A tl t ) 1 α 2) a constant

More information

Name: Date: 3. Variables that a model tries to explain are called: A. endogenous. B. exogenous. C. market clearing. D. fixed.

Name: Date: 3. Variables that a model tries to explain are called: A. endogenous. B. exogenous. C. market clearing. D. fixed. Name: Date: 1 A measure of how fast prices are rising is called the: A growth rate of real GDP B inflation rate C unemployment rate D market-clearing rate 2 Compared with a recession, real GDP during a

More information

How Much Equity Does the Government Hold?

How Much Equity Does the Government Hold? How Much Equity Does the Government Hold? Alan J. Auerbach University of California, Berkeley and NBER January 2004 This paper was presented at the 2004 Meetings of the American Economic Association. I

More information