Analysis is then performed on the extracted cyclical component RBC Cyclical

# Analysis is then performed on the extracted cyclical

This preview shows page 5 - 10 out of 17 pages.

Analysis is then performed on the extracted cyclical component. RBC: Cyclical components of Output, consumption & investment 2 H-P filter is Hodrick Prescott filter (also known as Hodrick Prescott decomposition ) is a mathematical tool used in macroeconomics, especially in real business cycle theory, to remove the cyclical component of a time series from raw data.
6 Business cycle facts / Findings: - Consumption and output volatility are very similar - Investment is much more volatile Note: Shaded areas reflect recessions. RBC: Cyclical components of Output, hours worked and employment. Findings: o Hours per worker are less responsive to changes in output than employment.
7 o Data is not consistent with RBC propagation mechanism that workers adjust hours in response to shocks. RBC model properties: RBC modelers did not work backwards from real world facts in making their modelling decisions, instead they began with a simple model & evaluated how well it matches facts about the business cycle (deductive approach). On the other hand, the microfoundations of the 3-Eq model were inductive based on incomplete contracts & imperfect competition to reflect the presence of involuntary 𝑈 at equ'm & the response of 𝑦 , ? to 𝐴? shocks. Assumptions of a simple RBC model: 1. Large number of identical, infinite-lived agents; Each agent is a ‘representative agent’. 2. When savings ↑, it is invested, so there is a larger capital stock next period. 3. There is perfect competition and perfect information. 4. Expectations are formed rationally. 5. There is full flexibility of nominal wages & prices, so RBC looks at real values. 6. There are random, persistent technological shocks which disturb the economy via shifting the production function.
8 Long-run properties: Steady-state growth. At steady state, there is constant rate of population growth and employment rate, thus the labor supply curve is vertical. In the RBC model, households are optimizing their consumption- savings (or leisure) choice i.e. savings is endogenous. The economy is characterized by a production function which includes exogenous technological progress. Technological progress determines the constant rate of growth of output per capita & real wages in the steady state. Fig 16.3: The labor demand curve shifts upward each period at the rate of technological progress → Labor productivity & real wages rise at this rate. RBC predictions are in line with rising productivity in advanced countries and no long-run tendency for an increase in employment.
9 The fact that rising real wages over long periods have not been accompanied with rising ? (?????𝑦???𝑡) is interpreted as an inelastic (vertical) labour supply curve. Thus, the model’s focus is on the household’s optimal choices of hours wo rked, as opposed to ? .

#### You've reached the end of your free preview.

Want to read all 17 pages?

• Summer '18
• Sagar Arora