PERMANENT AND TRANSITORY SHOCKS, AND THE UK BUSINESS-CYCLE

In this paper the business cycle properties of UK data are investigate d using a VAR technique. A Real Business Cycle (RBC) model is formulat ed. The model includes both permanent and transitory shocks to technol ogy. The business cycle properties of the data and the model are inves tigated by deriving the expected changes over various forecast horizon s from a VAR model. It is found, contrary to evidence in Rotemberg and Woodford (1996), that the model can account for many features of the data and that temporary shocks are pertinent in order to explain the b usiness cycle moments. The main difference between theory and data is present in hours worked. (C) 1997 by John Wiley & Sons, Ltd.