OUTPUT DYNAMICS IN REAL-BUSINESS-CYCLE MODELS

The time-series literature reports two stylized facts about output dyn amics in the United States: GNP growth is positively autocorrelated, a nd GNP appears to have an important trend-reverting component. This pa per investigates whether current real-business-cycle (RBC) models are consistent with these stylized facts. Many RBC models have weak intern al propagation mechanisms and must rely on external sources of dynamic s to replicate both facts. Models that incorporate labor adjustment co sts are partially successful. They endogenously generate positive auto correlation in output growth, but they need implausibly large transito ry shocks to match the trend-reverting component in output.