OUTPUT DYNAMICS IN REAL-BUSINESS-CYCLE MODELS

The time-series literature reports two stylized facts about output dynamics in the United States: GNP growth is positively autocorrelated, and GNP appears to have an important trend-reverting component. This paper investigates whether current real-business-cycle (RBC) models are consistent with these stylized facts. Many RBC models have weak internal propagation mechanisms and must rely on external sources of dynamics to replicate both facts. Models that incorporate labor adjustment costs are partially successful. They endogenously generate positive autocorrelation in output growth, but they need implausibly large transitory shocks to match the trend-reverting component in output.