We would like to thank Lars Hansen, Tim Kehoe, Jim Nason, as well as two anonymous referees for valuable comments. Harris Dellas is grateful to Ecoscientia Stiftung for its generous support.
Flexible Prices and the Business Cycle
Article first published online: 27 JAN 2012
© 2012 The Ohio State University
Journal of Money, Credit and Banking
Volume 44, Issue 1, pages 221–233, February 2012
How to Cite
COLLARD, F. and DELLAS, H. (2012), Flexible Prices and the Business Cycle. Journal of Money, Credit and Banking, 44: 221–233. doi: 10.1111/j.1538-4616.2011.00474.x
- Issue published online: 27 JAN 2012
- Article first published online: 27 JAN 2012
- Received October 30, 2007; and accepted in revised from August 12, 2009.
- signal extraction;
Business cycles models with flexible prices face two major empirical challenges. One regards observed output dynamics: the positive, short run, autocorrelation in GNP growth, and the hump-shaped, trend-reverting output response to transitory shocks (Cogley and Nason 1995). The other regards the alleged persistent decline in employment following a positive technology shock (Galí 1999). No determinate model with flexible prices has so far been able to address all of the Cogley Nason–Galí challenges. We show that the standard RBC model can do so if it contains a signal extraction problem involving permanent and temporary supply shocks.