Real business cycles and sunspot fluctuations are observationally equivalent

doi:10.1016/0304-3932(95)01243-5

Journal of Monetary Economics

Volume 37, Issue 1, February 1996, Pages 105-117

https://doi.org/10.1016/0304-3932(95)01243-5 Get rights and content

Abstract

This paper points out that real business cycle models are observationally equivalent to externality models, which we define as models with externalities and sunspots but without productivity shocks. As far as standard first-order systems are concerned, however, externality models turn out to be more flexible than RBC models. This explains, at least partly, why previous studies have found that externality models perform better than standard RBC models at generating realistic business cycle behavior. Our results cast doubt on the arguments of Farmer and Guo (1994) and Caballero and Lyons (1992).

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^∗: I would like to thank Ken West, an anonymous referee, and the editor Robert King for helpful comments and suggestions. Remaining errors are mine.

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Real business cycles and sunspot fluctuations are observationally equivalent

Abstract

Productive externalities and business cycles

Indeterminacy and increasing returns

Journal of Economic Theory

Growth and indeterminacy in dynamic models with externalities

Econometrica

External effects in U.S. procyclical productivity

Journal of Monetary Economics

Current real-business-cycles theories and aggregate labor-market fluctuations

American Economic Review

Productivity shocks and real business cycles

Journal of Monetary Economics

Real business cycles and the animal spirits hypothesis

Journal of Economic Theory

Invariant properties of Solow's productivity residual

Indivisible labor and the business cycle

Journal of Monetary Economics