{
  "title": "What Prevents a Real Business Cycle Model from Matching the U.S. Data? Decomposing the Labor Wedge",
  "publication": "IMF Working Papers, September 8, 2017",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2017/09/08/what-prevents-a-real-business-cycle-model-from-matching-the-u-s-45211",
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  "summary": "I carry out a business cycle accounting exercise (Chari, Kehoe and McGrattan, 2007) on the U.S. data measured in wage units (Farmer (2010)) for the entire postwar period.",
  "sections": [
    {
      "heading": "Methodology and Data Transformations",
      "content": "- Business cycle accounting exercise following Chari, Kehoe and McGrattan (2007).\n- Data measured in wage units following Farmer (2010).\n- Analysis covers the entire postwar period.\n- Approach preserves common medium-term business cycle fluctuations in GDP, its components, and the unemployment rate (contrasting with conventional filtering approaches that remove medium-frequency fluctuations).\n- Decomposition of the labor wedge into:\n  - labor supply wedge, and\n  - labor demand wedge."
    },
    {
      "heading": "Main Findings",
      "content": "- In the transformed (wage-unit) data, most movements in GDP are accounted for by the labor supply wedge.\n- This result reverses a central finding of the real business cycle literature that \"70% or more\" of economic fluctuations can be explained by TFP shocks.\n- Conclusion: the real business cycle model fits the U.S. data poorly because the assumption that households are on their labor supply equation is flawed.\n- The poor fit of the real business cycle model is masked when data are filtered with conventional approaches that remove medium-frequency fluctuations."
    },
    {
      "heading": "Interpretation and Theoretical Consistency",
      "content": "- The evidence points to problems in representing household behavior via the standard labor supply equation used in RBC models.\n- Findings are consistent with the literature on incomplete labor markets."
    },
    {
      "heading": "Key Concepts and Keywords Emphasized",
      "content": "- business cycle, business cycles\n- equilibrium unemployment\n- Labor demand; Labor supply; labor supply wedge; labor wedge\n- production function\n- standard deviation\n- TFP fluctuation; TFP shock\n- Unemployment; Unemployment rate\n- wage series; wage unit; Wages\n\nSource: Dmitry Plotnikov, IMF Working Paper, September 8, 2017.\n\n---\n\n Content in this bundle\n\n- wp17201\n  - wp17201 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp17201 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2017/09/08/what-prevents-a-real-business-cycle-model-from-matching-the-u-s-45211"
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    "Authors: Dmitry Plotnikov",
    "Published: September 8, 2017",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781484318584.001",
    "Business cycle accounting exercise following Chari, Kehoe and McGrattan (2007).",
    "Data measured in wage units following Farmer (2010).",
    "Analysis covers the entire postwar period.",
    "Approach preserves common medium-term business cycle fluctuations in GDP, its components, and the unemployment rate (contrasting with conventional filtering approaches that remove medium-frequency fluctuations).",
    "Decomposition of the labor wedge into:",
    "In the transformed (wage-unit) data, most movements in GDP are accounted for by the labor supply wedge.",
    "This result reverses a central finding of the real business cycle literature that \"70% or more\" of economic fluctuations can be explained by TFP shocks.",
    "Conclusion: the real business cycle model fits the U.S. data poorly because the assumption that households are on their labor supply equation is flawed.",
    "The poor fit of the real business cycle model is masked when data are filtered with conventional approaches that remove medium-frequency fluctuations.",
    "The evidence points to problems in representing household behavior via the standard labor supply equation used in RBC models.",
    "Findings are consistent with the literature on incomplete labor markets.",
    "business cycle, business cycles",
    "equilibrium unemployment",
    "Labor demand; Labor supply; labor supply wedge; labor wedge",
    "production function",
    "standard deviation",
    "TFP fluctuation; TFP shock",
    "Unemployment; Unemployment rate",
    "wage series; wage unit; Wages",
    "**wp17201**"
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