A Reassessment of Real Business Cycle Theory | Zendy

Ellen R. McGrattan | Zendy; Edward C. Prescott | Zendy

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A Reassessment of Real Business Cycle Theory

Author(s) -

Ellen R. McGrattan,

Edward C. Prescott

Publication year - 2014

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.104.5.177

Subject(s) - economics , business cycle , productivity , investment (military) , recession , total factor productivity , capital (architecture) , monetary economics , fell , macroeconomics , labour economics , econometrics , history , archaeology , politics , political science , law , paleontology , biology

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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