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Productivity Shocks And Real Business Cycles

C. Evans
Published 1991 · Economics

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Abstract Productivity shocks play a central role in real business cycles as an exogenous impulse to macroeconomic activity. However, measured Solow-Prescott residuals do not behave as an exogenous impulse. Rather, econometric evidence provided in this paper indicates that (1) money, interest rates, and government spending Granger-cause these impulses, and (2) a substantial component of the variance of these impulses (between one quarter and one half) is attributable to variations in aggregate demand. These results are robust to a number of econometric issues, including measurement errors, specification of the production function, and certain forms of omitted real variables.
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