Federal Reserve Bank of Minneapolis Quarterly Review. match between theory and observation is excellent but far “The from perfect” these artificial economies display fluctuations “We ask whether with statistical properties similar to those which the American economy has displayed... They do.” Prescott (2004) views the models as a success: on labour supply elasticity close to 3, TFP shocks “conditional are the major contributor to fluctuations in the period 1954-1981 in the p. 383 (TFP productivity) US” – 3? 1% rise in wages raises labour supply by 3% (people must be very responsive to wages) - he also notes that this finding seems to be robust to a number of extensions. learned that business cycle fluctuations are the optimal “We response to real shocks. The cost of a bad shock cannot be avoided and policies that attempt to do so will be Prescott p. 389 counterproductive ...” - So supporters think the exercise says that Walrasian, competitive models with shocks can give results like actual cycles and that these results have big implications for policy. Basic RBC Model: Conclusions - Romer pp. 226-229. - RBC models: extend Ramsey model to allow for fluctuations - Microfoundations:
Federal Reserve Bank of Minneapolis Quarterly Review. “The match between theory and observation is excellent but far from perfect” “We ask whether these artificial economies display fluctuations with statistical properties similar to those which the American economy has displayed... They do.” Prescott (2004) views the models as a success: “conditional on labour supply elasticity close to 3, TFP shocks are the major contributor to fluctuations in the period 1954-1981 in the US” p. 383 (TFP – productivity) 3? 1% rise in wages raises labour supply by 3% (people must be very responsive to wages) - he also notes that this finding seems to be robust to a number of extensions. “We learned that business cycle fluctuations are the optimal response to real shocks. The cost of a bad shock cannot be avoided and policies that attempt to do so will be counterproductive ...” Prescott p. 389 - So supporters think the exercise says that Walrasian, competitive models with shocks can give results like actual cycles and that these results have big implications for policy. Basic RBC Model: Conclusions - Romer pp. 226-229. - RBC models: extend Ramsey model to allow for fluctuations - Microfoundations: