Diagnostic evaluation of the real business cycle model with factor hoarding

Abstract

This paper proposes evaluating the assumptions of the RBC model rather than merely the ability of model-constrained data to mach moments of official data counterparts. Reduced-form relationships can be used to create model-consistent derivations of capital and labor input. Since several relationships exist for each input, comparison of their properties highlights weaknesses and strengths in the model assumptions. Applied to the RBC model with factor hoarding and depreciation through use, the approach highlights weaknesses in the standard utility function and casts doubt upon use of the model to improve official capital stock measures or utilization rates.Business cycles