Faculty of Economics and Business Administration Publications Database

Real Business Cycles under Test: A Multi-country, Multi-sector Exercise

Volume: 35
Number: 4
Pages: 933 - 960
Month: May
ISSN-Print: 0014-2921
Link External Source: Online Version
Year: 1991
Keywords: Business cycles; Economic models; Economic sectors; Business conditions
Abstract: According to the theory of real business cycles, exogenous technological productivity shocks are the primary source of economic fluctuations. Following the lines of the multisectoral Long and Plosser (1983) model, the paper shows that such a view of business cycles leads to an inherent sectoral ordering in which non-consumer sectors are exogenous. On the contrary, empirical evidence, based on VAR-testing and cross spectral methods, reveals that consumer goods sectors precede. This result can be explained by a simple extension of the dynamic Long and Plosser innovation process in which significant stochastic demand disturbances are taken into account. In particular, these demand shocks have to dominate inverse supply innovations. Such issues of real business cycle theory suggest that only a more explicit modelling of demand influences will reconcile theory with observation.