business cycle modelsThis paper illustrates a particular limited information strategy for assessing the empirical plausibility of alternative quantitative general equilibrium business cycle models. The basic strategy is to test whether a model economy can account for the response of the actual economy to an exogenous shock. To be useful, this strategy requires that we know how the actual economy responds to the shock in question and that different models generate different predictions for that response. Here we concentrate on the response of aggregate hours worked and real wages to a fiscal policy shock. Real wages and real money are the same and even familiar events. When you receive the wage you spend it, pay for bills, buy food and different supplies but you do not spend it for yourself, this amount is not enough for satisfying these possibilities. not to be disappointed in case you cannot let yourself something new visit the web site www.speedy-payday-loans.com and take a loan. you may borrow different sums of money. Really speaking everything is to your taste.

The fiscal policy shock is identified with the dynamic response of government purchases and average marginal income tax rates to an exogenous increase in military purchases.

Burnside, Eichenbaum and Fisher (1999) (BEF) show that standard Real Business Cycle (RBC) models can account for the salient features of how hours worked and after – tax real wages respond to a fiscal policy shock, but only if it is assumed that marginal tax rates are constant. When this counterfactual assumption is abandoned, RBC models cannot account for the response of the economy to a fiscal policy shock. For example, high labor supply elasticity versions of these models counterfactually predict that after a fiscal policy shock, government purchases are negatively correlated with hours worked. In reality, after a fiscal policy shock, government purchases and hours worked are strongly positively correlated. Low labor supply elasticity versions of these models greatly understate the conditional volatility of hours worked. So regardless of what is assumed about the elasticity of labor supply, the model cannot account for the facts. Ramey and Shapiro (1998) show that various two sector versions of the RBC model generate predictions for aggregate hours worked and real wages that are very similar to those of the one sector model. So presumably these models too would fail our diagnostic test. Rotemberg and Woodford (1992) and Devereux, Head and Lapham (1996) study the effects of changes in government purchases in stochastic general equilibrium models which incorporate increasing returns and oligopolistic pricing. Since their models imply that a positive shock to government purchases raises real wages, they would fail our test.