Real Business Cycle Theory
From Hobson's Choice
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External Links
- For a favorable treatment of RBC theory, see Sergio Rebelo, "Real Business Cycle Models: Past, Present, and Future"
, Northwestern University & NBER (March 2005);
- A good article explaining the connection between the Solow-Swan Classical Growth Theory and RBC theory is Mark Rush's "A primer on real business cycles or the ABCs of RBCs," Business Economics (July 1990).
In order to conduct empirical work with their models, many real cycle researchers often use so-called "Solow residuals" as a proxy for technology shocks. [...] Basically, a production function relationship for aggregate GNP is assumed, say a Cobb-Douglas production function for GNP with labor and capital as inputs. Assuming that factors are paid their marginal products, data on the total shares of output going to an input can be used to infer the coefficients of the production function. Now, any change in output can be viewed as resulting from either a change in inputs or a change in technology. Using the estimated production function coefficients, it is easy to deduce what would be the change in GNP from one year to the next if only the inputs changed. Then, any difference between the actual change in GNP and this calculated change must be attributed to changes in technology.
The estimated Solow residual shocks play a crucial role in calibrating real cycle models. [...] If the basic work adequately captures the impact from changes in inputs, then any additional change in output must result from a shift in technology.
