TY - CHAP
T1 - RBC Methodology and the Development of Aggregate Economic Theory
AU - Prescott, Edward
N1 - Funding Information:
Aggregate economics is not the only science with unobservable variables. A translation of a quote by Albert Einstein reads: “Not everything that counts can be counted, and not everything that can be counted counts.” The key relation is the accounting profit equation. The bigger the net unmeasured intangible investment, the smaller were these problems. This finding, along with the fact that accounting profits were a small share of GDP in this hours boom period, is consistent with intangible investment being large. Other evidence is from the National Science Foundation. The NSF provides estimates of private R&D expenditures, which are an important component of intangible capital investment. These investment expenditures in percentage terms increased much more than measured investment expenditures during the 1990s boom.
Publisher Copyright:
© 2016 Elsevier B.V.
PY - 2016
Y1 - 2016
N2 - This essay reviews the development of neoclassical growth theory, a unified theory of aggregate economic phenomena that was first used to study business cycles and aggregate labor supply. Subsequently, the theory has been used to understand asset pricing, growth miracles and disasters, monetary economics, capital accounts, aggregate public finance, economic development, and foreign direct investment. The focus of this essay is on real business cycle (RBC) methodology. Those who employ the discipline behind the methodology to address various quantitative questions come up with essentially the same answer—evidence that the theory has a life of its own, directing researchers to essentially the same conclusions when they apply its discipline. Deviations from the theory sometimes arise and remain open for a considerable period before they are resolved by better measurement and extensions of the theory. Elements of the discipline include selecting a model economy or sometimes a set of model economies. The model used to address a specific question or issue must have a consistent set of national accounts with all the accounting identities holding. In addition, the model assumptions must be consistent across applications and be consistent with micro as well as aggregate observations. Reality is complex, and any model economy used is necessarily an abstraction and therefore false. This does not mean, however, that model economies are not useful in drawing scientific inference. The vast number of contributions made by many researchers who have used this methodology precludes reviewing them all in this essay. Instead, the contributions reviewed here are ones that illustrate methodological points or extend the applicability of neoclassical growth theory. Of particular interest will be important developments subsequent to the Cooley and Hansen (1995) volume, Frontiers of Business Cycle Research. The interaction between theory and measurement is emphasized because this is the way in which hard quantitative sciences progress.
AB - This essay reviews the development of neoclassical growth theory, a unified theory of aggregate economic phenomena that was first used to study business cycles and aggregate labor supply. Subsequently, the theory has been used to understand asset pricing, growth miracles and disasters, monetary economics, capital accounts, aggregate public finance, economic development, and foreign direct investment. The focus of this essay is on real business cycle (RBC) methodology. Those who employ the discipline behind the methodology to address various quantitative questions come up with essentially the same answer—evidence that the theory has a life of its own, directing researchers to essentially the same conclusions when they apply its discipline. Deviations from the theory sometimes arise and remain open for a considerable period before they are resolved by better measurement and extensions of the theory. Elements of the discipline include selecting a model economy or sometimes a set of model economies. The model used to address a specific question or issue must have a consistent set of national accounts with all the accounting identities holding. In addition, the model assumptions must be consistent across applications and be consistent with micro as well as aggregate observations. Reality is complex, and any model economy used is necessarily an abstraction and therefore false. This does not mean, however, that model economies are not useful in drawing scientific inference. The vast number of contributions made by many researchers who have used this methodology precludes reviewing them all in this essay. Instead, the contributions reviewed here are ones that illustrate methodological points or extend the applicability of neoclassical growth theory. Of particular interest will be important developments subsequent to the Cooley and Hansen (1995) volume, Frontiers of Business Cycle Research. The interaction between theory and measurement is emphasized because this is the way in which hard quantitative sciences progress.
KW - Aggregate economic theory
KW - Aggregate financial economics
KW - Aggregation
KW - Business cycle fluctuations
KW - Depressions
KW - Development
KW - Neoclassical growth theory
KW - Prosperities
KW - RBC methodology
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U2 - 10.1016/bs.hesmac.2016.03.001
DO - 10.1016/bs.hesmac.2016.03.001
M3 - Chapter
AN - SCOPUS:85000948012
SN - 9780444594877
T3 - Handbook of Macroeconomics
SP - 1759
EP - 1787
BT - Handbook of Macroeconomics, 2016
A2 - Taylor, John B.
A2 - Uhlig, Harald
PB - Elsevier B.V.
ER -