NONNESTED TESTS OF 3 COMPETING THEORIES OF BUSINESS CYCLES

This paper tests the Keynesian, new classical and real business-cycle theories against each other as non-nested hypotheses using quarterly d ata for the US covering the period 1959:1-1989:2. The results indicate that no one theory stands out as the dominant explanation of the busi ness cycle. This contrasts with the findings of earlier work which is mostly concerned with testing the Keynesian against the new classical theory. We find that the introduction of a third theory, the real busi ness-cycle theory which accounts for real factors, blurs the distincti on between the demand-sided Keynesian, and the new classical theories.