hn l h nd th b n l
M rt n E h nb
t r ll h r r h n r n h tr t K dl nd nd r n h f d r tt (19 r bl t n tr t nd n n th r l t v - n l z pl n r l l br d l f p rt n f d ff r nt h t th U S n n h h t hn l h r t n t v t r pp r ntl bl t nt f r all tp t h tr d t n l v h r d b M n t r t v r b l t n th p t r U S ld n n nd K n n l th t x n h K dl nd nd r tt r n n (19 5 t r t d nd h th nd d b nd th r r r h r h d th t v r nt f h ft n n t r p l r ntr l p l th b C d l r l bl t t th b n l Irr p t v f th r nt f r th r l t v v l t l t f r - th r d ff r n dh r nt f th tr d t n l t v r bl h r l n pt n n- v h r th n l f tr v n t v t nt nd p r p t h r r d G v n nd r t nd th h n b h h n - th f nd n th n d f r n d t th r t r p l ff t r t n t v- f n t r nd f l r f n t b l t t h t h l pr n rh p h r p t d l h f th l t 15 n n th nt f r r h d - r nd th l r t n p f t hn l - v t d t th t p h d l n d pr p - l h n h v l d t br d n n th t l n n th t h n n r t d nd t rpr n l C th r h v n- r th n r f b n l h r t d r t d l f ntr v r In p rt th d l n f th tr d t n l v n d d th ntr v r r v lv r nd th b t nt v th d v l p nt f r p f d l ll - l d b C n l t At th t v l n n l n C l ( C t th r h b n n d r bl ntr v r th r In h rp ntr t t th tr d t n l b t th f t th t C n l t ddr th v C th r t xpl n th b - d t n h hl t l z d n r l l br n l n th t b tr t fr n t r d l ll th r t l d l C n d r t n nt r l A rd n t th d l b tr t fr d ff r nt p t f r l- th r x n h t r t p- pl h t hn l h r th r t l M rt n E h nb pr f r f n t r f p l t p t r U S b n rth t rn Un v r t nd n r n lt nt t l Wh l C th r t d n t l th t th d r l rv n f Ch . h th r th n Cr rn d , r n Chr t n , S r n t r p l nh r ntl n tr l th d b l , h S r nt, nd M r W t n f r b l v th t C d l n pt r th l - th r dv nd h lp. h rt l b d p n nt f t r f p t r U S b n l " l b n l th r : d r h ?," f rth n , rn l f E n n nd th t n rp r t n n t r h nt C ntr l. th n l
4 ECONOMIC PERSPECTIVES ity. According to this criticism, all theoretical the strong conclusions which mark the RBC models, including RBC models, are wrong. literature depend critically on this assumption. While I agree that theoretical models are nec- Absent this crucial assumption, the sharp infer- essarily false, this criticism overlooks the real ences which RBC analysts draw regarding the usefulness of many theoretical models. What importance of technology shocks are not sup- is striking about RBC models is their apparent ported by the data. I conclude that although ability to account for important features of the technology shocks almost certainly play some business cycle, despite their obvious simplic- role in generating the business cycle, there is ity. simply an enormous amount of uncertainty This article assesses the quality of the about just what percentage of aggregate fluc- empirical evidence provided by RBC analysts tuations they actually do account for. The to support their substantive claims regarding answer could be 70 percent as Kydland and the cyclical role of technology shocks. I argue Prescott (1989) claim, but it could also be 5 that the data and the methods used by these percent or even 200 percent. analysts are, in fact, almost completely unin- formative about the role of technology shocks A pr t t p l l n C l M d l in generating aggregate fluctuations in U.S. RBC models share the view that aggregate output. In addition I argue that their conclu- economic time series correspond to the evolu- sions are not robust either to changes in the tion of a dynamic stochastic equilibrium in sample period investigated or to small pertur- which optimizing firms, labor suppliers, and bations in their models. For these reasons, I consumers interact in stochastic environments. conclude that the empirical results in the RBC The basic sources of uncertainty in agents' literature do not constitute a convincing chal- environments constitute the impulses to the lenge to the traditional view regarding the business cycle. The type of impulse which has cyclical importance of aggregate demand received the most attention are shocks to the shocks. aggregate production technology which affect The remainder of this article is organized both the marginal productivity of labor and the as follows. The second section summarizes marginal productivity of capital. the evidence used by RBC analysts to support Under these circumstances the time series the claim that technology shocks account for on hours worked and the return to working most of the variability in aggregate U.S. out- correspond to the intersection of a stochastic put. I then argue that the empirical approach labor demand curve with a fixed labor supply used by RBC analysts, commonly referred to curve.' As long as agents are willing to substi- as "calibration," does not provide useful input tute labor over time, an increase in the time t into the problem of deciding which impulses marginal productivity of labor ought to gener- have been the major sources of postwar fluc- ate an increase in per capita hours worked, real tuations in output. The third section analyzes wages, and output. Given a temporary in- the sensitivity of RBC conclusions to simple crease in aggregate output and a desire on perturbations in the model as well as to agents' part to smooth consumption over time, changes in the sample period investigated. these theories also predict a large positive Finally, the fourth section contains some con- increase in investment as well as a positive but cluding remarks. smaller increase in consumption. hn l h nd r t In order to assess the quantitative implica- tp t fl t t n tions of RBC theories it is useful to focus our This section reviews the basic empirical attention on one widely used RBC model—the results presented by RBC analysts to support Indivisible Labor Model associated with Gary their contention that aggregate technology Hansen (1985) and Richard Rogerson (1988). shocks account for a large percentage of ag- The basic setup of that model can be described gregate U.S. output fluctuations. In presenting as follows. The economy is populated by a these results I abandon the RBC analysts' finite number of infinitely lived, identical, counterfactual assumption that the value of the perfectly competitive individuals. Each per- model's structural parameters are actually son is endowed with T units of time which can known, rather than estimated. I then show that be allocated towards work or leisure. To go to
FEDERAL RESERVE BANK OF CHICAGO r p r n t n r f x d t t hn l h r pl t l tr n t r d n n t d n t r f h r f f r n th d nd f r nv t nt d ld b l r h l n th f th r d p r n ff t d b t hn l h n t nt f h r th t r n n ll th d l pp th t l t h- p r n h ( –f– h r f l r An n - n l h v rn nt p r h f d pl d p r n h h r f l r Ind - nd rv v lv rd n t t t n r v d l r b t l r nd n pt n t t r r v pr h h d pl p t v d ff r nt p nt n t C n ntl l b r r l rr l t n h n th t p t v ppl b h v r d p nd n n b r f f - h t v rn nt p r h l d nt t t r r t th t p l nd v d l r b t xp t n ll h h l v l f v rn nt th rr nt r t rn t r n v r t n n pt n f r p r d t h l r In th t p l d l h h r r l h h r th pr nt v l f v rn nt n- r t t d pl th t r p pl h pt n th h h r th p r v d l v l f t r t d th t l b r ppl r r ll- l p t x f d b th t p l nd v d l n t b t t t n pt n f r l r S - h r lt n n t v n ff t tr n l t nd rr nt l b r ppl l d p nd n th nt n n r n th r t ppl f l b r r t rn t r n t d v r th r t rn t nd th r f r l br pl nt nd r n n th f t r In th t p l d l tp t th n th t n r p n t t p r r l In rd n t th d l nt h h r t t d r p pl h t f t nd f n rt nt —th l v l f r t d th t l b r ppl r r ll n t hn l nd th l v l f v rn nt p r- t n n nt rt p r l b t t t n f h Sh t th v r bl r th l l r nd n pt n r f r t fl t t n t v A rd n t th d l p rf tl - h t th r f th v r bl t nd t n- p t t v f r b n l b r rv nd d n r n r t tp t h r lt- p t l t pr d n l t r bl d h h n fl t t n n r t v l v r bl r ld n p t t v r t h d n n t p r l tr n t r f r t r n r t th b n d d t l r d p t l pr n f p t l t nd t nd r l rr - n p r d l t r An p rt nt f t r f th l t n n th nd n v r bl f th d l d l th t f r pr d t n t hn l S nd th x n v r bl —th t t f r bj t t t h t t hn l h t hn l nd th l v l f v rn nt— r r x pl p t v t hn l h d t b r ll rr l t d v r t n r th r n l pr d t v t f b th h r d r r f rr d t th x f r th pr p t l nd l b r Oth r th n l h d t l f th d l h ld n r f r d nd f r l b r nd p t l In th t p l d l th t hn l- Q nt t t v pl t n f th th r h d l d t t n r t r - In r p rt n th d l nt t t v pl - r v pr h h d pl p t v r l t n I ll f n tr t n n rr l t n h n th t p t v t hn l- " nt " h r f r t rt n h r t r - h r xp t d t p r t v r t t f th d t n r t n pr h lth h n t p r n ntl h pt n n r v r n M nt r l f d th t t hn l h r n t p r n nt rd n t th r rd r An nth rd r nt p rt l rl p rt nt f r th d l l b r r f r t th xp t d v l f n nth rd r r t pl t n If th h r p r- p l n l f n t n f th v r bl n - n nt th r n l pr d t v t f l b r nd t n An x pl f f r t rd r nt th r t rn t r n ld b p r n ntl ld b th n nd t n l xp t d v l f h h r Oth r th n l th ld h t t tp t E . Ex pl f nd rd r ff th n nt v f r l b r ppl r t n- nt f th tp t pr r th n nd - t rt p r ll b t t t l r n r p n t t n l v r n f E[t E t]2 , nd th v r - n n r n th r t rn t r n h n b t n tp t t t t nd t t-- pt n th t t hn l h r p r - E[ –E t][ t –E t ]. An x pl f nd t nt p rt l rl p rt nt f r th d l rd r nt nv lv n t v r bl ld b p t l r t pl t n It t t f r th v r n b t n t t tp t nd t t p t l nv t nt t t fr t n If th h r r d E[ t E t][nt Ent].
6 ECONOMIC PERSPECTIVES A S pp th t d n t th d l tr - t n n And n rd r t n r th - t r l p r t r b th v t r I G v n t n t d d n h t ll p rt rb - p rt l r v l f r I t tr htf r rd t t n n A- d d th d l pl t n f r d Unf rt n t l th x t n C l t r t r v r t f nt h h ht b f nt r t d n t ff r h h lp n n r n th In pr t C n l t h v n ntr t d n t n h b C n l t h v th r d l pr p rt f r ll t f n t d f r l n tr th d th r t nt h h th r d r b th l nt th t h n d l p r t r v l r f t r f th b n l h nt l t d r t th t h n th f ll p r- h h h r v d th t tt nt n th t r z d d l p r d t th d t t nd rd d v t n f tp t l C n - In t d th v r t f nf r l t h- l t l r p rt th r d l pl t n f r n n n " l br t n " Unf rt - bj t l th t nd rd d v t n f n- n t l f r d n t p rp th t h- pt n nv t nt v r pr d t v t n r n t t f t r lt rn t v t nd h r r d Wh l th l t f nt f r l n tr th d h b b n n xh t v t pr r l n bj t l r r nd v r bl nd h n th d n n f th d t th t C n l t r bj t t pl n rt nt C l br t n h v l d th r j r t hn n r th pl n rt nt n- nt f h th r d l h - h r nt n h t t t A r lt th l - d d n nt n f r nt C br t r t r n t n r p n t th t d nd t n th r p r l n l n t n " h nf d n d h v p rt l r v l f r I h d l th t th d l nt f r 1 p r nt f pr d t n f r nt th n p r d th v r n f tp t?" t n t t f th rr p nd n d t - h t th r pl n n rt nt n r n- nt h r t b t n th t n - d v r bl l f ll fr th f t th t t d r f rr d t th p r nt f th - th r t t t n th n d f n d b nt n t n f r h h th d l - r tt (19 th t th r r l v l d nt r x pl On d r th v r n f f n t n f th d t In th f th tp t Wh n C n l t th t th pr f r f th t d p nd n d t r n d
d l nt f r 1 p r nt f th v r - j ntl b th f n t n d f n n O d, 1 nd n f tp t h t th n th t f r th r ( A rd n t E t n (1 pl n nt th r d l ld l t n rt nt n n f th r nd v r bl pl th x t n f pl n n rt nt ( 1 = 272),„, n In f t all f th bj t r r nd v r bl bj t t pl n n rt nt r th n r t r d n t th v r n th n d r f r t W d n t n th f d l tp t l l t d nd r th p- tr v r n f U S tp t d h p p - t n th t I l t nd th d n n t r l t n nt h h t b t t d v d n t n t t f th v r n f t l ll d f n d f n t n f th d t S n it U S tp t h l th t t hn l h d n t t f d r nd v r bl nt f r t f th fl t t n n p t r bj t t pl rr n rt nt xt n- U S tp t rr p nd t th l th t d r th v t r t th estimated v l f th l r n b r th th rr nt t t b n d l tr t r l p r t r It t r n- b t n 75 nd 1 d p nd n n x tl d v r bl bj t t pl n n rt nt h h C d l d th n d r n l nt f ‘11 l v l t th t p f l b- p r t r th t v rn th r n l ph l tr t f r th nt fr l n t v- pr d t v t f l b r C l br t r t p ll t t p rt rb t n n th th r r h n n h v l f r h h pl th t th pl p r d b n n d r d A d - th d l r pr d th " b rv d" h r f n r n d t n h h n- l b r n n t n l n t d n t b- f d n t pl n t t nt l " h d l rv th p p l t n v l f l b r h r n nt f r p r nt f th v r b l t f n t n l n ; th n bj t h h t tp t " t t n r th t n n d b t t d v f n t n f th d t t n h n t v t ll p rt rb - S n th t t r d f n d b th t f n t n
FEDERAL RESERVE BANK OF CHICAGO The Indivisible Labor Model: a prototypical Real Business Cycle Model .
The representative individual's time t utility In the aggregate, consumption plus gross level depends on time t consumption, c , and time t investment plus government purchases of the good leisure, If , in a way described by the function cannot exceed current output, that is the economy is subject to the aggregate budget constraint, (1 U( = ( t + v(1 (4) c, + k[+] — (1-8)k, + x, 5 y 1 . The functions u and v are strictly increasing, concave functions of consumption and leisure, The variable x, denotes time t government respectively. At time zero, the typical individual purchases of the goods. seeks to maximize the expected discounted value of To derive the quantitative implications of the his/her lifetime utility, that is, preceding model we must specify the functions summarizing preferences and technology, u, v, and CO F, as well as the laws of motion governing the evo- (2) E I lit U(ct, 1,), lution of the technology shocks and government t=0 purchases. In addition we must be specific about the market setting in which private agents interact. where E0 denotes the expectations operator condi- As in most existing RBC studies, we suppose that tional on the typical person's time zero information households and firms interact in perfectly competi- set and 13 is a subjective discount rate between zero tive markets. As it turns out, deriving the competi- and one. tive equilibrium of our model is greatly simplified The single consumption good in this economy if we exploit the well-known connection between is produced by perfectly competitive firms using a competitive equilibria and optimal allocations. constant returns to scale technology, F(kt, ), This connection allows us to analyze a simple which relates the beginning of time t capital, k, , "social planning" problem whose solution happens total hours worked, n ,, and the time t stochastic to coincide with the competitive equilibrium of our level of technology, z , to total output. The stock of economy. capital evolves according to In displaying the planning problem which is appropriate for our economy it is useful to first (3) k[+] = (1-5)k, + 1 make explicit Hansen's assumptions regarding preferences and technology. The function ( t ) is where t denotes time t gross investment assumed to be given by In(ct). Total time t output, and 5 is the constant depreciation rate on capital, y1 , is assumed to be produced using the production 0 < 8 < 1.
A bj t t pl n n rt nt t It In r nt r r n Chr t n nd I f ll th t (t h h d p nd n d n t nt f pl n n r- l r nd v r bl bj t t pl n t nt n th d n t t t t t p ll d n rt nt b C n l t h b d t t l z h pr v d n nd t th t ll v r n f n n (19 G n r l z d f th l nt r r d t l l t A r M th d f M nt pr d r n h h th r nd v r bl Cl rl A ll nh r t th t t n r t r n t p th t n ff t r nd n nd pl n n rt nt n t th t t d p r t r v l d n n t t nt l nt S n l br t n t h- t n d l nd pl f r t rd r - n tr t th l nt f A( y e 1 nd nt f th d t It t rn t th t th v l- M) y m f x d n b r th t hn r v r l r t th v l pl d n t l tr t A f x d n b r r th r th n x t n C t d r x pl t C r nd v r bl A n n l - t d th t th rt rl d pr t n br t n t hn nn t b d t nt f r t nd th h r f p t l n th r - th pl n n rt nt nh r nt n n bj t t pr d t n f n t n (1— l 5 l A d th n t f r l n- nd 3 r p t v l O r pr d r ld tr th d p nt t t f 1 nd 35 r p t v l
8 ECONOMIC PERSPECTIVES function l e n , z, = z, n,u. The technology where 0 is some positive scalar. The planner maxi- shock, z1 , evolves according to mizes ( subject to the resource constraint
(5) zt7' At ( + — (1 - + x t = = exp(e ). and the laws of motion for z, and x, given by (5)
Here A, is the stationary component of z,, pQ is and (6). a scalar satisfying I p,, I < 1, E is the time t innova- There are at least two interpretations of the tion to n(A 1 with mean e and standard deviation term involving leisure in ( . First, it may just 0E . The parameter y is a positive constant which reflect the assumption that the function v( 1 is governs growth in the economy.' In addition gov- linear in leisure. The second interpretation builds ernment purchases are assumed to evolve according on the assumption that there are fixed costs of to going to work. Because of this individuals will either work some fixed positive number of hours or (6) x = y tg not at all. Assuming that agents' utility functions are separable across consumption and leisure, = g j exp(1.1t )• Rogerson (1988) shows that a market structure in Here 1is the stationary stochastic component which individuals choose the probability of being of x,, p g is a scalar satisfying I [3 I < 1, and t is the employed rather than actual hours worked will innovation in In( , with mean Ix and standard support the Pareto optimal allocation. With this deviation a . interpretation, equation ( represents a reduced Proceeding as in Hansen (1985) and Rogerson form preference ordering which can be used to (1988) it can be shown that the competitive equilib- derive the competitive equilibrium allocation. rium laws of motion for r , ,, and n , correspond to However, at the micro level of the individual agent, the solution of a planning problem in which the parameter 0 places no restrictions on the elas- streams of consumption services and hours worked ticity of labor supply. are ranked according to the criterion function: 'Our model exhibits balanced growth, so that the log of all real variables, excluding per capita hours worked, have an unconditional growth rate of y. (7) E E (ln(c,) + 0(T—n t )) t=0
The key difference between the proce- ary inducing transformation of the data must b dures d n t l h n th p nt t - d pt d A v r t f lt rn t v r v l bl t f th r th d ff r n th t b t th n l t r x pl r t p pl n f r l n tr r pr d r th t th d t r r l z t n f tr nd t t n- ll t tr n l t pl n n rt nt r pr th th l f ll r l v r bl b t th f n t n f th d t h h d f n ( x l d n p r p t h r r d r n r t t r f 1 nt pl n n rt nt l n r f n t n f t S n p b l t r rd n t lf h nf r t n l d t ld b t d tr nd th t r r n n t r l d f n t n f h t ll p rt rb t n fr th d l ll th t l d t - n It In t rn th t p bl t n- n l n r t tr nd nd l l t th - t f n rt nt b t th d l nt nt f th l n rl d tr nd d r pl t n A d ff r nt pr d r nv lv d tr nd n f r r p rt n th r lt f pl nt- d l t r nd th d t n th f lt r n th pr d r f r th Ind v bl b r d d n dr nd r tt (19 Al- M d l I t d r f r n nt nd th h r p nt t t f r n t b- d th n h h r th h ndl d t n d n tr n f r d d t d n t nd In pr t p r l r f bj t l nt r lt r n r t d n th tr n - d pl r d tr nd th t t t n- f r t n f d l t r nd U S d t
E E A ESE E A K O C ICAGO I d th f r thr r n r t n th r n th C l t r t r r p rt r lt Indivisible Labor Model— b d n th dr r tt ( f lt r In selected second moments rd r t v l t th r l t d r bl t n z th d ff r n b t n r pr - Wh l pl d r S nd th f lt r n f t t t n- S nd Ind v bl r nd n tr n f r t n f r tr nd t t n r nt U.S. d t b r M d l pr S th r n th n l ll r n .44 . th n tr n f r d d t U n t j t (.0 (.24 nt t th rt n th t f d p rt - [.6 ] l r t f nd nt nt r t n d - n t d v And th rd ll f th l l t n 2.22 2.6 (.0 (. r p rt d n th rt l r l d n th [.4 ] l n rl d tr nd d d t ll r th r t h l t t v r lt r v r l r h l . .0 (.20 (. th nt t t v r lt pr v d v n tr n r [.8 ] v d n n f v r f th p nt I h t .22 .0 S pr nt n r lt b d n th f lt r C7n/ A • (. 2 (.46 l n ppr pr t n rv t v r p rt n [. 2] tr t n .0 .0 l t l t nd th Ind v bl (.002 (.00 b r M d l [. 4]
U n r t U S t r d t v- SOU CE C. rn d , M. E h nb , nd S. r n th p r d 1955 3-19 rn d E h- b l , " b r h rd n nd th b n l ," n r pt, rth t rn Un v r t . nb nd b l (199 t t d th Ind - Wh l pl rr p nd t th pl p r d v bl b r M d l d d n th x nd : 84:4. b r n p r nth rr p nd t t nd rd pl nt d th d n t pr d r d v l- rr r . p d n Chr t n nd E h nb (199 A b r n br t r f r t th pr b b l t v l f th t t t t t d b rn d , E h nb , b t f r r lt r r pr d d n bl 1 nd b l ( 0 t t t h th r d l nd d t h th rd l n r z th Ind v bl nt r th n p p l t n. b r M d l pl t n f r th t nd rd d v t n f h r r d n th v l t l t f n pt n nv t nt nd v rn nt p r- bl 1 h th t th Ind v bl b r h r l t v t tp t 4 , 6 , / nd / M d l d ll n nt n f r th v l t l- r p t v l ll th v l t l t f h r t f n pt n nv t nt nd v rn- r d r l t v t pr d t v t n/ A h nt p r h r l t v t tp t ll nd l n f th t bl r p rt th r t - th v l t l t f h r r d b th n b l t t f th rr p nd n U S d t nt t r nd r l t v t th v l t l t f pr d - h l n l b l d "Ind v bl b r M d l" t v t In p rt l r n nn t r j t t n- nt n thr n b r f r h nt h v nt n l n f n l v l th n ll h p th - t p n b r th d l p nt pr d t n f r th t th d l v l f „ , h nt h r l l t d n th l nd APL r l t th rr p nd- p nt t t f bt n d b rn d n d t p p l t n nt E h nb nd b l (199 1 h ddl n b r th t t d t nd rd rr r f th hn l h nd r t fl t t n n th Ind v bl b r f r t n b r nd r fl t pl n n rt nt M d l n r h nt l t t d th n ll h p th th t th d l nt l th bl r p rt b t f r r lt f r p p l t n nt h b tt n b r l th Ind v bl b r M d l h h p rt n th pr b b l t v l f th Ch - r t t t th t n f h t p r nt f r t d d n Chr t n nd E h nb (f rth- fl t t n r nt d f r b t hn l n f r t t n h h p th h h f r t r rr p nd t th d l n h h th r r h t t hn l
20 ECO OMIC E S EC I ES A E 2 l r h r r t d l f n rt nt r - rd n h t p r nt f th v r b l t f t- Ind v bl b r M d l— v r b l t f tp t p t th d l nt f r A t t rn t th n rt nt r fl t n rt nt r rd n Wh l pl p nd l t x l v l Un rt nt r - rd n th v l f th th r p r t r f . th d l h n l bl ff t ° Ind v bl .008 . 86 .0 .82 r 1 pr nt r ph l d p t n f b r M d l (.00 (.026 (.00 (.64 th Ind v bl b r M d l pl t n f r (v r bl A E h p nt n th r ph n r t d b v rn nt f x n t p f v l nd th n t t n Ind v bl .008 . 86 .0 . 8 th h p th th t = l vd h v rt l x b r M d l (.00 (.026 (.00 (.64 r p rt th pr b b l t v l f r t t t t - ( n t nt v rn nt t f r th rr p nd n v l f A rd- n t r 1 th Ind v bl b r M d l SOU CE: C. rn d , M. E h nb , nd S. b l , " b r h rd n nd th b n l ," nt f r l ttl 5 p r nt r n r pt, rth t rn Un v r t . h p r nt f th v r t n n p r Wh l pl rr p nd t th pl p r d : 84:4. p t U S tp t n th n th t n th r f b r n p r nth rr p nd t t nd rd th h p th n b r j t d t nv n- rr r . t n l n f n l v l It f ll th t th th d t t th Ind v bl b r M d l l t pl t l n nf r t v b t th ll t v rn nt p r h h - r l f t hn l h n n r t n fl - nd r rr p nd t th d l n h h th t t n n U S tp t 1 In p rt l r n nl h t nt nv r n nt r t - nn t n l d n th b f th r lt h t h ft n th r t pr d t n t h- th r th t t hn l h r th pr r n l b r n p r nth d n t th h t r t tp t r th t t hn l t nd rd rr r f th rr p nd n t t t h pl d v rt ll n r l n n r t n All n rt nt n th d l t t t r fl t fl t t n n r t tp t An nf r- n rt nt r rd n th v l f th tr - n b t th l l r l f t hn l t r l p r t r nl " h n th p t r U S b d l l n th r f t r f th r lt d rv p nt t t f nj t f bl nt r t th t nd rd rr r t d th r p nt t t f th p r t r v- S n t v t f r lt t p rt rb t n n th d l rn n r l rr l t n n th t hn l In th pr v t n I n l z d h h p r r t l r h p rt nt b th pl t n f C d l r r t l ? ld b r d fr th v n- n n t b n t v t h n n th p - t p nt f p f C d l In th t n I nv t t h n t v th p nt r t r p ll n n hb rh d f p t t f t lf t ll p rt rb t n n l t n 1 S nd th t nd rd rr r n r t t f th t nd rd d v t n f th th d l I b n b d n th p t f nn v t n t th t hn l h r l b r h rd n nd pl p r d l t n n t l r Ev d ntl th r b t nt l n- th p r l p rf r n f th Ind v bl rt nt r rd n th p p l t n v l f th b r M d l p r t r v rn n th v l t n f th t h- In rp r t n l b r h rd n nt th n l h h rd n rp r t n v rn- Ind v bl b r M d l nt p r h nt th d l n r th In rd r t d n tr t th fr l t f v l f nl l htl fr 7 p r nt t t ll p rt rb t n n th th r th - p r nt 13 rth th f t th t l 7 t n n rp r t p rt l r v r nt f l b r p r nt h n th nl h r t t hn l h rd n nt th Ind v bl b r M d l pp r t b n t nt th l th t t h- h n r l n t n f l b r h rd n r f r t n l h xpl n l r p r nt f th b h v r t d th th f t th t f r d v r b l t n p t r U S tp t 1 t n t l th r l b r f r t f ll p - h v r th t th t nd rd rr r f v r
FEDERAL RESERVE BANK OF CHICAGO 2 FIGURE 1 IndIVIsible Labor Model (constant government)
p-value 1.0
0.8
0.6
0.4
0.2
0.0 o 0.5 1.0 1.5 2.0 2.5 >,.- _ variance of Y (model) I variance of Y (data)
ity. Given the costs of hiring and firing em Hall (1988), among others, has argued that ployees, firms may find it optimal to vary the if Solow residuals represent good measures of intensity with which their labor force is used, exogenous technology shocks, then under per rather than change the number of employees in fect competition, they ought to be uncorrelated response to transient changes in business con with different measures of fiscal and monetary ditions. policy. In fact they are not. Evans (1990) has Existing RBC models, including the Indi shown that the Solow residuals are highly cor visible Labor Model discussed in the second related with different measures of the money section, interpret virtually all movements in supply. And Hall (1988) himself presents evi measured average productivity of labor as dence they are also correlated with the growth being the result of technology shocks. This is rate of military expenditures. the rationale given by authors like Prescott In ongoing research, Craig Burnside, Ser (1986) for using the Solow residual as a meas gio Rebelo, and I have tried to assess the sensi ure of exogenous technology shocks. In prac tivity of inference based on Solow residual tice, RBC analysts measure the Solow residual accounting to the Lucas/Summers critique. as that component of output which cannot be The model that we use incorporates a particular explained by the stock of capital and hours type of labor hoarding into a perfect competi worked, given the assumed form for the aggre tion, complete markets RBC model. The pur gate production technology. Given our func pose of this Labor Hoarding Model is twofold. tional form assumptions, the time t value of First, we use that model to assess the extent to the Solow residual, 2" equals y,l(k/-an,")' Vari which movements in the Solow residual can be ous authors, ranging from Lucas (1989) to explained as artifacts of labor hoarding type Summers (1986), have questioned this ration behavior. Second, we use the model to investi ale by conjecturing that many of the move gate the fragility of existing RBC findings with ments in the Solow residual which are labelled respect to the possibility that firms engage in as technology shocks are actually caused by labor hoarding behavior. Our basic findings labor hoarding. To the extent that this is true, can be summarized as follows: empirical work which identifies technology (I) Labor hoarding with perfect competi shocks with the Solow residual will systemati tion and complete markets accounts for the cally overstate their importance to the business observed correlation between government con cycle. sumption and the Solow residual.
22 ECONOMIC PERSPECTlV!lS (II) Incorporating labor hoarding into the What does the competitive equilibrium of analysis substantially enhances the model's this model look like? Since agents' criterion overall empirical performance. This improve- functions are separable across consumption and ment is particularly marked with respect to leisure, the consumption of employed and un- three important qualitative features of the joint employed individuals will be the same in a behavior of average productivity and hours competitive equilibrium. The problem whose worked. First, average productivity and hours solution yields the competitive equilibrium for worked do not display any marked contempora- this version of the model is given by neous correlation. Second, average productiv- ity leads the cycle in the sense that it is posi- Maximize tively correlated with future hours worked. 00
Third, average productivity is negatively corre- (5) E E { ln(ct ) + 0N,ln(T-E-e,f) + 0(1-1\l )ln(T)} lated with lagged hours.1 7 t=0 (III) We conclude that RBC models are quite sensitive to the possibility of labor hoard- subject to the aggregate resource constraint ing. Allowing for such behavior reduces our estimate of the variance of technology shocks (6) A k,' -a(yNte rfr c, + x, + by roughly 60 percent. Depending on the sample period investigated, this reduces the In (6), the variable x, denotes time t government ability of technology shocks to account for purchases of goods. See the Box for a descrip- aggregate output fluctuations by 30 to 60 per- tion of the law of motion for x,. cent. If we assume that firms see the time t reali- zation of the technology shock and government The basic setup used by Burnside, Eichen- consumption before choosing employment and baum, and Rebelo (1990) to generate these effort levels, N, and e,, then this model is obser- conclusions can be described as follows. As in vationally equivalent to the Indivisible Labor the Indivisible Labor Model of the second sec- Model described in the Box. How can we per- tion there is a fixed cost, of going to work. turb the model so as to capture labor hoarding As before the length of the work day equals f behavior? A simple way to do this, without hours. Consequently the time t criterion of an changing the nonstochastic steady state of the employed person is given by model, is to suppose that N, must be chosen before, rather than after, time t government (2) ln(c,) + consumption and the level of technology is known. To provide a bound for the effects of Here c, denotes time t consumption, the labor hoarding in this setup, we maintain the parameter 0 is a positive constant, and e, de- assumption that the shift length, f, is constant. notes the level of time t effort. The time t crite- The intuition underlying this perturbation rion function of an unemployed person is just is that it is costly for firms to vary the size of their work force. In the limit it is simply not (3) ln(c,) + Oln(T). feasible to change work force size in response to every bit of new information regarding the The aggregate production technology is now state of demand and technology. This notion is given by captured in the Labor Hoarding Model by as- suming that firms make their employment deci- (4) y, = A, ktl- a(gNtetf)a. sions conditional on their views about the fu- ture state of demand and technology, and then Here N denotes the total number of bodies adjust to shocks by changing labor effort. This going to work at time t and k, denotes the stock adjustment is costly because workers care about of capital at the beginning of time t. The ran- effective hours of work.1 More generally, in- dom variable A, denotes the time t technology corporating unobserved time varying effort into shock while y is a positive constant which gov- the model can be thought of as capturing, in a erns growth in the economy. See the Box for a rough manner, the type of measurement error description of the way in which A, evolves over time.
FEDERAL RESERVE BANK OF CHICAGO 2 nd d b th f t th t n n nd tr pt n r p rt d h r r d d n t v r n n t r 3 h h th b r rd n n th t l h r r d h x- M d l r p nd t 1 p r nt nn v t n n pl n t n f pr l l pr d t v t h b n t hn l G v n nt ll n n t n- ph z d b v r th r h r t rt p r ll b t t t ff t v l r v r (19 9 t th r p nd t th h n th f r t S pp th t n n l t p t d th p r d b n r n ff rt b b t p r nt S l r d l n th f r l S t = A r lt th S l r d l r b 1 3
ytl(ktl anta), h r n, r p rt d h r r d t p r nt n r p n t th 1 p r nt t hn l t t. rn d E h nb nd b l h A n n v S l r d l nt n (199 h th t f l b r ff rt t v r - x r t th tr n t d f th t hn l- n th S l r d l th t t n r p - h W n l d th t n v S l n nt f th tr t hn l h nd ff rt r d l nt n t t ll v r t - r n l br t d t th r v th r l - t th l v l f t hn l n b - t n h p t t ll nd r t t th l v l f t h- n l n r n nd t t ll v r- (7 S = At + t t th v r n f th tr t hn l h r th p r r pt d n t th d v t n f t th t r b r rd n M d l d th n t r l l f v r bl fr t t d n t ll f r v r t n n th d r t h h t t v l h l l n r l br l f p t l t l z d h f t th t p t l t l z - t n f r e:, th ff rt l v l f th f r t n r t v r n pr l l nn r h l r pl t n f r th n h h v - ( t =pl t +p t +p3At +p4 t nt n th S l r d l r nt rpr t d h b th S l r d l t p ll C 7C 7C h r I 2' 3' nd ; r n nl n r f n t n l l t d nd r th pt n th t th t f th tr t r l p r t r f th d l f p t l f ll t l z d Und r th G v n rn d E h nb nd - r t n h n n th p t l t l z - b l p nt t t f th d l tr t r l t n r t ld h p n n xpl n d p r t r b th t 3 nd 7r4 r p t v 1 9 h n r n tp t th t h n n th pl th t th r th n l t pt l t S l r d l S n r b r rd n r h rd r h n f d th p t v nn - M d l d n t ll f r t v r n p t l v t n n v rn nt p r h r t hn l t l z t n r t t v r t t th xt nt t th t effort will be procyclical. r x pl h h v nt n th S l r d l r r pr nt th r p n f th b r d b x n t hn l h In- rd n M d l t 1 p r nt nn v t n n rp r t n p t l p t t l z t n d - v rn nt n pt n pt n th n nt th d l ld pr bl f rth r n b r f p pl pl d nn t d - r d th l l r l f t hn l h " t l r p nd t th h v r ff rt r b v r 15 p r nt n th f r t p r d nd S pl p r d n t v t th n r v rt t t t d t t l v l n l ( f r d n h n rp r t n l b r h th pl d v nt n th S l h rd n nt th d l ff t nf r n r d l S n ff rt h n p n th f r t r rd n A t f r t th p t f p r d b t t t l h r f r h v n t pl p r d l t n n nf r n r- h n d th S l r d l n r b b t r r h r h v d nt d th f t th t 1 p r nt h tr even though there th r th r t f v r pr d t v t l d has been no technology shock whatsoever. A d n b t nt ll n th l t 19 d - p n l (d h pr d t v t r n th f r t nt th l l h d f br n th d t th t p r d b 1 p r nt n r p n t th 1 p r- h n n th n nd t n l r th f nt nn v t n n v rn nt n pt n v r pr d t v t rn d E h b v S l r d l nt n f l l nt r- nd b l (199 p rf r d r f t r - pr t th n r n v r pr d t v t t v Ch t t U n th t t f nd r n fr h ft n t hn l r th r th n th t th n ll h p th f n br th t n n x n n r n v rn nt n- h n n th n nd t n l r th r t
24 ECONOMIC PERSPECTIVES IGU E 2 Labor Hoarding Model—shock to government
0.20 — (a) ( b
0.
0. 0
0.2
0.
M r d A (Av r pr d t v t f l b r
0.0
0. 0
rejected at very high significance levels at all (.986), is substantially larger than those ob- dates during the interval 1966:1-1974:2. The tained in the first (.86) and second (.88) actual break point we chose was 1969:4, how- sample periods. This is exactly what we ever, our results are not sensitive to the precise would expect if there were indeed a break in break point used. the Solow residual process...2 1 Third, estimates In the same article we also discuss the of G, the standard error of the innovation to impact of allowing for a break in the data on technology, are also quite sensitive to the our estimates of the structural parameters. For choice of sample period. The estimated value both the Indivisible Labor Model and the La- of oE equals .0060, .0101, and .0089, in the bor Hoarding Model, there are four important first, second, and whole sample periods, re- differences in the parameter values across the spectively. Fourth, the estimates of 7 (the different sample periods. First, the estimated growth rate in government consumption), p values of the unconditional growth rate of the (the parameter which governs serial correla- Solow residual, in the first and second sample tion in government purchases), and o l, (the periods, .0069 and .0015 respectively, are standard error of the innovation to government quite different. Second, the estimated value of purchases) are affected in the same qualitative the coefficient governing serial correlation in way as the analog parameters governing the the technology shock, p,, is quite sensitive to a evolution of the Solow residual. However the break in the sample period. For example, quantitative differences are even larger. using the Indivisible Labor Model, the esti- These results have an important impact on mated value of p over the whole period the models' implications for some of standard
E E A ESE E A K O C ICAGO 2
b r rd n M d l— h t t hn l ( 1 -
S l r d l
•• M Ur d A I ..
( r d pr dt tl t ,.... , 0( l b r •.: ••:.: ,••:• •
diagnostic moments discussed in the second sponding data population moments. However, section. Table 3 reports the Labor Hoarding Table 4 indicates that the performance of both and Indivisible Labor Models' predictions for models deteriorates significantly when we
cs, 6/6„ 0 6„ 64 6,, and oi/ A over the allow for a break in the sample. This deterio- whole sample period. In addition that table re- ration is quite pronounced with respect to the ports our estimates of the corresponding data relative volatility of consumption and invest- moments. Table 4 reports the corresponding ment. Indeed using either sample period, and results for the two subsample periods. Taken any conventional significance level, we can together, these tables substantiate our claim reject the hypotheses that these model mo- that the empirical performance of RBC models ments equal the corresponding data population depends on sample period selection. moments. Interestingly this result is not due to Recall that when the Indivisible Labor the fact that the data moment estimates change Model was estimated over the whole sample substantially. Rather, it is due to the fact that period, there was very little evidence against the models' implications for the two moments the model's implications for these moments. appear to be quite sensitive to a break in the Table 3 shows that this is also true for the sample. For example over the whole sample Labor Hoarding Model. Using the whole period, both models imply that consumption is sample there is very little evidence against the roughly half as volatile as output. However, individual hypotheses that the values of when estimated on the separate sample peri-
6 or 6 6, that emerge ods, both models predict that consumption is ", Gt lo v 6 rlo from either model are different from the corre-
26 ECONOMIC PERSPECTIVES A E : would expect that, holding interest rates con- stant, the response of consumption to an inno- Indivisible Labor Model vs. Labor Hoarding Model—selected vation in the technology shock should also fall. second moments Given that Christiano (1987) also shows that the impact of technology shocks on the interest
Wh l pl rate in standard RBC models is quite small, it Ind v bl b r is not surprising that the model predicts lower S nd U.S. b r rd n values for o /a in the subsample periods. nt d t M d l M d l Since output equals consumption plus invest- j , .44 . .48 ment plus government consumption, and the (.0 (.24 (. latter does not respond to technology shocks, it [.6 ] [.80] follows that, other things equal, investment is
, 2.22 2.6 2. more volatile because consumption is less (.0 (. (.4 volatile. [.4 ] [.2 ] b r h rd n nd ll 1.15 .0 .2 Given the sensitivity of inference to (.20 (. (. [.8 ] [. 0] sample period selection, we allow for a break in the data in reporting the impact of labor .22 .0 .0 C5n/GA hoarding on A.. To begin with, consider the (. 2 (.46 (.4 [. 2 [. ] implications of allowing for time varying effort on the parameters governing the law of n .017 .0 .0 motion of technology shocks. Comparing (.002 (.00 (.00 [. 4] [. 6] Tables 5 and 6 we see that this change in the
model leads to a large reduction in 6 E . Based SOU CE: C. rn d , M. E h nb , nd S. b l , " b r h rd n nd th b n l ," n r pt, on the whole sample period, the variance rth t rn. Un v r t . (square of the standard error reported in the "Wh l pl rr p nd t th pl p r d table) of the innovation to technology shocks : 84:4. b r n p r nth rr p nd t t nd rd drops by roughly 35 percent. In Sample period rr r . 1 and Sample period 2 this variance drops by b r n br t r f r t th pr b b l t v l f th t t t t t d b rn d , E h nb , nd 48 and 56 percent, respectively. Evidently, b l ( 0 t t t h th r d l nd d t breaking the sample magnifies the sensitivity nt r th n p p l t n. of estimates of oE to time varying effort. A different way to assess this sensitivity is to consider the unconditional variance of the only a fourth as volatile as output. stationary component of the technology shock, The intuition behind this last result is , which equals oE/(1–pa2). Allowing for time straightforward. According to the permanent varying effort reduces the volatility of technol- income hypothesis, an innovation to labor ogy shocks by over 58 percent in the whole income causes households to revise their con- sample period, 49 percent in Sample period 1, sumption by an amount equal to the annuity and 57 percent in Sample period 2. These value of that innovation. If income was a first results provide support for the view that a order autoregressive process that displayed large percentage of the movements in the positive serial correlation, then the annuity observed Solow residual may be artifacts of value of the innovation would be a strictly labor hoarding type behavior. increasing function of the coefficient govern- How do these findings translate into ing serial correlation in income. Using a changes regarding the model's implications for model very similar to our Indivisible Labor k? Tables 5 and 6 indicate that over the whole Model, Christiano (1987) shows that the in- sample period, introducing labor hoarding into come effect of an innovation to the technology the analysis causes 2 to decline by 28 percent shock depends positively on the value of p , from .81 to .58. The sensitivity of X is even the parameter which governs the serial correla- more dramatic once we allow for a break in tion of the technology shock. Since the point the sample. Labor hoarding reduces X by 58 estimate of p falls in both subsamples, we percent in the first sample period and by 63
FEDERAL RESERVE BANK OF CHICAGO 2
A E 4 Indivisible Labor Model vs. Labor Hoarding Model- selected second moments: subsamples
S pl p r d S pl p r d 2
b r Ind v bl b r Ind v bl
U.S. rd n b r U.S. rd n b r
r t r n A d t M d l M d l d t M d l M d l
.49 .2 .24 .42 .2 .22 (.08 (.0 (.0 (.0 (.0 (.0 [.00 [.02 [0.0] [.00 ]
l 2.08 . 2 . 8 2.2 .4 .42 (. (. (. 6 (.08 (. (. 8 [0.0] [0.0] [0.0] [0.0]
2.20 . 0 . 0 . . 6 .46 (.42 (.2 (.4 (.08 (. 0 (.0 [.24] [. 0] [.04] [. ]
.00 . .8 . .2 2. (. 6 (.0 (. 0 (. (.0 (.64 [. 8] [.2 ] [.40] [. 4]
S r : C. rn d , M. E h nb , nd S. b l , " b r h rd n nd th b n l ", n r pt, rth t rn Un v r t . S pl p r d . : 6 4. S pl p r d 2 0: 84: . b r n p r nth rr p nd t t nd rd rr r . b r n br t r f r t th pr b b l t v l f th t t t t t d b rn d , E h nb , nd b l ( 0 t t t h th r d l nd d t nt r th n p p l t n.
p r nt n th nd p r d h h th t th t t d v l f b l 1 7 th th n b t nt v C l -t hn l t nd rd rr r l t 7 h pr b b l t h nt f r t f th v r b l t n l t f b pl d b r d l l 1 r t tp t- very n t v t th th t nd rd rr r f rn d E h- pr n f l b r h rd n I n l d th t nb nd b l t t d th h p th th t ntr d n l b r h rd n nt th n l th t r r n ff nt r th n r l nd r n th n b t nt v p p l t n nd f nd th t th n ll h p th l f C th r t nn t b r j t d t nv nt n l n f n l v l h r h v r h t r h S l r d l nd v rn nt n pt n v d n n t th n ll h p th n ll f r br n th pl p r d h f r l v n d n f th b r pr b b l t v l f r t t t t t 9999 rd n M d l l t p nt t n r b t nd n th f r t nd nd b pl f b d r v d n n f v r f th t d l r p t v l 3 S h l th r v rt ll n r l t v t x t n C d l ll (19 v d n n t th n ll h p th n th f r t 19 9 h ph z d th f t th t th S l b pl th r b t nt l v d n r d l pp r t b rr l t d th v r t n t t n th nd b pl v rth - f bj t l v rn nt n pt n l t l r th t th b r rd n M d l r d b l t r xp nd t r Ex t n d b t nt ll b tt r th n t nd rd C C d l pl th t th rr l t n ff - d l n th d n n f th d t nt ht t l z r nd r t nd th nt t t v pl t n f r d l f r th C n l n rr l t n pr d d n ll (19 nd In th rt l I h v tr d t th t t d th r r n ff nt b, f th n b t nt v nt nt n f C d l r th r t f th S l r d l n th n l th v th t r t t hn l r th r t f r r f v rn nt h nt f r t f th fl t t n n n pt n U n th h l pl p r d p t r U S r t tp t M n
28 ECONOMIC PERSPECTIVES A E A E 6 Ind v bl b r M d l- b r rd n M d l- v r b l t f tp t b pl v r b l t f tp t b pl
r . Y Wh l pl .008 . 86 .0 .8 Wh l pl .00 2 . .0 . 8 (.00 (.026 (.6 (. 6 (.00 2 (.02 (.00 (. 4
S pl p r d .0060 .862 .0 .6 S pl p r d .0042 .86 .0 . (.0022 (.0 (. ( . (.0006 (.04 (.00 (.20
S pl p r d 2 .0 0 .884 .028 .42 S pl p r d 2 .006 .882 .0 . 2 (.00 (.06 (.00 (.6 (.0006 (.06 (.00 (. 2
SOU CE: C. rn d , M. E h nb , nd S. b l , SOU CE: C. rn d , M. E h nb , nd S. b l , " b r h rd n nd th b n l ," n r pt, " b r h rd n nd th b n l ," n r pt, rth t rn Un v r t . rth t rn Un v r t . Wh l pl rr p nd t th pl p r d : Wh l pl rr p nd t th pl p r d : 84:4. S pl p r d : 6 :4. S pl p r d 84:4. S pl p r d : 6 :4. S pl p r d 2 0: 84: . 2 0: 84: . b r n p r nth rr p nd t t nd rd rr r . b r n p r nth rr p nd t t nd rd rr r .
n l n th t th v d n pr nt d b nt f th d t In v t h C n l t t fr l t j t f th pr r h b n d t r v rt t th n h l- tr n l It d n t r l nd r n f p r l t t t l n l f th d t th tr d t n l v th t h t r t C rt nl n d t n th f t t d nd r th r f p l t th d n n d p l r r r th n b n l th r t r f th d t G d p l v r th C l t r t r h - d n r r p r ll pl bl tr t r l d d n h n th t d n t h t n d l h h v nt f th n r l l br d l n b d t C l t r t r r nf r pt th t f ll r n z r th ht b t th pr r p bl h f l r f th t l t r - b n l n nt t t v On t r r nf r v th t h v nn t h lp b t b pr d b th b l t f t b f r n d l r pl C d l t r pr d rt n
OO O ES
S f r x pl S r (19
7S f r x pl r tt (19 h n t t rr t n n r l l br nt xt If n r /l b r ppl r n th d pr d n f r th n th r l n n ff t t d th S f r x pl K dl nd nd r tt (19 n n t hn l h If l r n r l d th n th r (19 5 r tt (19 K dl nd nd r tt (19 nd th n l th l b r ppl rv ld h ft n rd n K h nd K dl nd (19 9 r p n t p t v t hn l h Chr t n nd
E h nb (199 h th t h n t hn l h 9S K n nd b l (19 Al n r nt r n t p r n nt th nt t t v p t f th ff t K ttn r (199 h h n th t th l l p n nt f n l bl f lt r d d t r bl n n pt f p t nt l r l G t l l 3 S A r Chr t n nd E h nb (199 f r d n f th ff t f v rn nt p r h n th 1 O r p nt t t f 0, 8, p , E, p , nd l l t h t n t r r th d l 55 ( 3 7 ( 1 ( 3 9 ( 9 ( 13 979 ( 1 nd 1 5 ( 11 S d S f r x pl K dl nd nd r tt (19 19 9 E h nb nd b l (199 f r d t l
5S f r x pl n n (19 " h d t nd n tr th d l nd rl n th t t r d d n rn d E h nb nd S Chr t n nd E h nb (f rth n
FEDERAL RESERVE BANK OF CHICAGO 2 b l ( 0 . O r p nt t t f , 0, , p., nd ., "It f ll th t l b r t b p n t d f r r n l .6 (.006 , . 0 (.040 , .02 (.000 , . 86 (.026 , h rd r. W n d n t b pr b t th x t p n nd .008 (.00 . b r n p r nth d n t t n t n h b th pt l d ntr l z d ll t n d rd rr r . n b f nd b lv n th ppr pr t l pl nn n pr bl f r r d l n . 2 S n n ( 88 nd Chr t n nd E h nb ( 0 . r th d l r p nt t t f , 0, , p., E, p , nd 6 l .6 (.006 , .68 (.0 , .02 (.000 , . In l d n v rn nt n th d l d h v p rt nt (.02 , .00 2 (.00 2 , . (.02 , nd .0 4 (.00 . S pl t n f r th d l pr d t n l n th r d n rn d , E h nb , nd b l ( 0 f r d t l . n f th d t h th rr l t n b t n v r pr d t v t nd h r r d. S Chr t n nd E h n 20 n n n r r h Cr rn d nd I r nv t t b (f rth n . n th .
4 O r p nt t t f d .0 th t nd rd rr r f 2 S rr n ( 88 . .002. 22 ll ( 8 r th t t v r n ff rt n t pl S rn d , E h nb , nd b l ( 0 . bl xpl n t n f th rr l t n. h th , h f r t l l t th r th r t f ff t v l b r np t r r d 6 h th d d b rn d , E h nb , nd b l t xpl n ll f th b rv d v nt n t t l f t r ( 0 t t t th d l tr t r l p r t r pr d t v t . r th r h btr t th r th nt t n x tl d nt f d v r n f n n r t f t l h r r t n r t t r n th ( 82 G n r l z d M th d f M nt pr d r . r r th r t n r ff rt. r th t th pl d bl th nf d n nt rv l ld b n rr d b v nt n r ff rt r pl bl l r . h p n r f th d l r tr t n , v x l l t n d n t ppl t r n l b t pr l l h d t t n pr d r r n v r d nt f d th t th r r n h t pr d t v t , n p G n r l z d M th d f M nt pr d r . U n h t n h h l rl t v r n th r d l. pr d r ld r lt n b t nt ll d ff r nt t t
f n p r n th th x t n C l t r t r 3 1n th f r t pl th p nt t t f .0 8 th
v r d ff lt. S Chr t n nd E h nb (f rth t nd rd rr r .0 . h v l f th t r fr n f r d n f th p nt. r d l .0 th t nd rd rr r f .02 . r th
nd pl th p nt t t Of .280 th t n "G rd n ( pr nt v d n n th n r l ph d rd rr r f .0 , h l th v l f pl d b th n n n h h h l b l th " nd f xp n n pr d t v d l .022 th t nd rd rr r .004. t l d n". M C ll ( 8 l d nt l r p tt rn f r th d n rr l t n b t n v r pr d t v t nd tp t.
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Backus, David K., Patrick J. Kehoe, and Christiano, Lawrence J., and Martin Eich- Finn E. Kydland, "Int rn t n l tr d nd enbaum, "Un t r t n r l G — b n l " d r l rv n f n nd d r ? " Carnegie-Rochester M nn p l W r n p r 5 19 9 Conference Series on Public Policy: Unit Roots, Investment Measures and Other Essays, Blanchard, Olivier J., "A tr d t n l nt rpr - All n M ltz r d 3 199 pp 7- t t n f r n fl t t n " Ameri- can Economic Review, 79 19 9 pp 11 - Christiano, Lawrence J., and Martin Eich- 11 enbaum, "C rr nt r l b n l th r nd r t l b r r t fl t t n " Burnside, Craig, Martin Eichenbaum, and American Economic Review, f rth n Sergio T. Rebelo, " b r h rd n nd th
0 ECONOMIC PERSPECTIVES Evans, Charles L., " r d t v t h nd Kydland, Finn E., and Edward C. Prescott, r l b n l " M n r pt Un v r t " h r f p t l nd t l l f S th C r l n 199 pl t n " Journal of Monetary Econom- ics, 1 19 pp 3 3- Fair, Ray, The Short Run Demand for Work- ers and Hours, rth- ll nd bl h n Kydland, Finn E., and Edward C. Prescott, C p n A t rd 19 9 " r nd pl nt v r t n n b n l th r " In t t t f r E p r l E n - Gordon, Robert J., " h nd- f- xp n n n p r 17 19 9 ph n n n n h rt-r n pr d t v t b h v- r " Brookings Papers on Economic Activity, Lucas, Robert E. Jr., "C p t v rt 1979 pp 7- 1 nd p r l pr d t n f n t n " American Economic Review, p r nd r d n Hall, Robert E., " h r l t n b t n pr 197 pp 13 5-1371 nd r n l t n U S nd tr " Journal of Political Economy, 9 19 pp 9 1- 7 Lucas, Robert E. Jr., "Exp t t n nd th n tr l t f n " Journal of Economic Hall, Robert E., "Inv r n pr p rt f th Theory, 197 pp 1 3-1 S l r d l " h E W r n p r 3 3 19 9 Lucas, Robert E. Jr., " h ff t f n - t r h h n pr r t n dv n " Hansen, Gary D., "Ind v bl l b r nd th M n r pt Un v r t f Ch v b r b n l " Journal of Monetary Eco- 19 9 nomics, 1 19 5 pp 3 9- McCallum, Bennett T., " l b n l Hansen; Gary D., " hn l pr r nd d l " Modern Business Cycle Theory, r t fl t t n " M n r pt Un v r- b rt rr d rv rd Un v r t r t f C l f rn An l 19 19 9 pp 1 -5
Hansen, Lars P., " r pl pr p rt f Perron, P., " h r t r h th l pr n r l z d th d f nt t t r " h nd th n t r t h p th " Econom- Econometrica, 5 19 pp 1 9-5 etrica, 55 19 pp 77-3
Hodrick, Robert J., and Edward C. Prescott, Edward C., " h r h d f b - Prescott, " t- r U S b n l n n l r nt " d r l rv p r l nv t t n " M n r pt C rn - n f M nn p l Quarterly Review, 1 -M ll n Un v r t 19 19 pp 9-
King, Robert G., and Sergio T. Rebelo, Rogerson, R., "Ind v bl l b r l tt r nd " fr n f lt r n nd r l b n l br " Journal of Monetary Economics, l " M n r pt Un v r t f h t r 1 19 pp 3-17 19 Summers, Lawrence J., "S pt l Kuttner, Kenneth., "A n ppr h t n n- b rv t n n r l b n l th r " nfl t n r p t nt l G " n r pt d- d r l rv n f M nn p l Quar- r l rv n f Ch 199 terly Review, 1 19 pp 3- 7
Kydland, Finn E., and Edward C. Prescott, " t b ld nd r t fl t t n " Econometrica, 5 19 pp 13 5-7
FEDERAL RESERVE BANK OF CHICAGO