Working Paper

Are taste and technology parameters stable? a test of \"deep\" parameter stability in real business cycle models of the U.S. economy

Abstract: Lucas (1976) criticized Keynesian models because of parametric instability. For many economists, the \"Lucas critique\" provided a reason to replace the Keynesian approach with equilibrium models of the business cycle. One example of the equilibrium approach is the Real Business Cycle (RBC) model. However, RBC models have not been subjected to the same scrutiny of tests of parameter instability. We present a prototypical RBC model and subject it to structural change tests. Our results document evidence of extensive parameter instability. Thus, the \"Lucas critique\" is applicable and we conclude that the single representative agent class of RBC models has an invalid structural form.>

Keywords: Business cycles; Business forecasting;

Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: Working Papers

Publication Date: 2001

Number: 01-05