Faculty of Economics and Business Administration Publications Database

Real Business Cycles: Is Neglecting Demand Shocks Justified?

Volume: 17
Number: 4
Pages: 463 - 484
ISSN-Print: 0377-7332
Year: 1992
Keywords: Business cycles; Consumer goods; Supply and demand
Abstract: Real business cycle models generally neglect demand shocks. Technological productivity shocks are the primary source of economic fluctuations. The multisectoral consequences of this assumption are described in the well-known model of Long and Plosser (1983). The presented paper shows that according lo their view consumer goods sectors must be found in lagging positions. However, generalizing the strong assumption of pure supply driven dynamics by some demand-determined influences leads lo ambiguous theoretical results such that only empirical evidence can answer the question whether sectoral lead-lag relationships are in accordance with real business cycle theory. Using cross spectral analysis and causality tests leads to a rejection of the Long and Plosser view of intersectoral comovements. On the contrary, the empirical results suggest that the backward propagation mechanism of demand shocks dominates the forward propagation of supply disturbances.