Flexible prices and the business cycle

Deskripsi

Business cycles models with flexible prices face two major empirical challenges. One regards observed output dynamics: the positive, short run, autocorrelation in GNP growth, and the hump-shaped, trend-reverting output response to transitory shocks (Cogley and Nason 1995). The other regards the alleged persistent decline in employment following a positive technology shock (Gali 1999). No determinate model with flexible prices has so far been able to address all of the Cogley Nason-Gali challenges. We show that the standard RBC model can do so if it contains a signal extraction problem involving permanent and temporary supply shocks. .Printed journal