American Economic Review: Vol. 104 No. 5 (May 2014)

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A Reassessment of Real Business Cycle Theory

Article Citation

McGrattan, Ellen R., and Edward C. Prescott. 2014. "A Reassessment of Real Business Cycle Theory." American Economic Review, 104(5): 177-82.

DOI: 10.1257/aer.104.5.177

Abstract

During the downturn of 2008–2009, output and hours fell significantly, but labor productivity rose. These facts have led many to conclude that there is a significant deviation between observations and current macrotheories that assume business cycles are driven, at least in part, by fluctuations in total factor productivities of firms. We show that once investment in intangible capital is included in the analysis, there is no inconsistency. Measured labor productivity rises if the fall in output is underestimated; this occurs when there are large unmeasured intangible investments. Microevidence suggests that these investments are large and cyclically important.

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Authors

McGrattan, Ellen R. (U MN)
Prescott, Edward C. (AZ State U)

JEL Classifications

E13: General Aggregative Models: Neoclassical
E32: Business Fluctuations; Cycles
E44: Financial Markets and the Macroeconomy
G01: Financial Crises


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