Are technology shocks random? A study of time series properties of technological change

Abstract

The real business cycle (RBC) models attribute economic fluctuations to random technology shocks in a competitive economy (Kydland and Prescott, 1982, 1991). Kydland and Prescott’s RBC models are macro level models of the aggregate economy and their idea of random technology shocks is based on the observed random walk component in the aggregate time series data on total factor productivity (TFP) available for several economies. The RBC models do not usually employ statistical estimation and testing. The standard methodology in this stream comprises simulations of aggregate competitive economies with plausible parameters to calibrate models for the purpose of closely approximating the behaviour of real economies.