Working Paper

Comment on Gali and Rabanal's "Technology shocks and aggregate fluctuations: how well does the RBC model fit postwar U.S. data?"

Abstract: Gali and Rabanal provide statistical evidence that, in their view, puts into question the real business cycle paradigm in favor of the sticky-price paradigm. I demonstrate that their statistical procedure is easily misled in that they would reach the same conclusions even if their data had been simulated from an RBC model. I also demonstrate that sticky-price models do a poor job generating U.S.-like business cycles with only shocks to technology, the federal funds rate, and government consumption. This explains why Gali and Rabanal need large unobserved shocks to preferences and to the degree of monopoly power.

Keywords: technological innovations; Business cycles - Econometric models;

Status: Published in NBER Macroeconomic Annual 2004> (Vol. 19, 2005, pp. 289-308)

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Staff Report

Publication Date: 2004

Number: 338