Methodological and empirical issues in real business cycle theory

• Published in: European economic review 1993, Vol.37 (1), p.1-35
• Main Authors: Pierre Danthine, Jean, Donaldson, John B.
• Format: Article
• Language: English
• Subjects: Business cycles; Business forecasts; Correlation analysis; Economic conditions; Economic models; Economic theory; Labor market; Macroeconomics
• ISSN: 0014-2921; 1873-572X
• DOI: 10.1016/0014-2921(93)90068-L

In this paper, we argue that the major impact of the RBC literature has been to propose a new methodology for macroeconomics. This methodology is distinguished first by the importance it attributes to the empirical description of the phenomena to be explained and, second, by the use of this description in conjunction with ‘quantitative theorizing’, i.e., the construction of computable general equilibrium models whose characteristic statistics match those of the data. In accordance with this approach, we first report on the current state of knowledge concerning business cycle regularities and conclude that additional empirical effort is called for in order to arrive at the appropriate basis for theorizing. We then examine the performance of existing models and evaluate the case for integrating monetary factors and demand shocks into them. Lastly we review the recent efforts to explain the employment variability puzzle, and argue that the search for a solution naturally leads to the incorporation of significant non-Walrasian features into the RBC framework.