Real Business Cycle Model

Evidence and data

Check output, consumption, investment, hours, and productivity co-movement against impulse-response patterns.

Calibration or measurement

Deep parameters are calibrated from steady-state ratios, labor supply, depreciation, and shock persistence.

Boundaries

• No nominal policy channel.
• Labor-market clearing is strong.
• Financial amplification is absent.

Use guidance

When sufficient

Long-run growth decomposition and the cyclical role of productivity shocks when prices and wages are fully flexible. The model gives a clean accounting benchmark for how much of output variance is attributable to TFP versus other sources, and for matching co-movements among output, consumption, investment, and hours under a technology-driven interpretation of business cycles (Kydland-Prescott 1982 Econometrica; King-Plosser-Rebelo 1988 JME).

When sketch only

Do not use for any question involving inflation, involuntary unemployment, or the short-run effects of monetary policy. The model has no nominal side and treats all unemployment as voluntary. Cyclical patterns that depend on distinguishing real from nominal shocks require a framework that can tell the two apart.

When to switch

Switch to a New Keynesian DSGE (dsge:nk) when the question involves nominal rigidities, monetary transmission, or demand-driven fluctuations. The NK extension retains the real dynamics while adding the sticky prices and wages that give monetary policy real effects.

Falsification signal

A persistent labor wedge that moves closely with identified monetary-policy shocks falsifies the model's core claim that fluctuations are efficient responses to real disturbances. If tighter money reliably raises the measured tax-equivalent gap between the household marginal rate of substitution and the marginal product of labor, the flexible-price assumption is the problem, not the productivity-shock mechanism.