Real Business Cycles

Chapter 22Evaluating a real business cycle model

C. Hargreaves (ed.) Nonstationary Time Series Analysis and Cointegration Oxford: Oxford University Press, 1994, pp. 225–255

Fabio Canova, Mary Finn and Adrian R. Pagan^*

Most real business cycle models have been assessed by studying the correspondence of their predictions to a set of stylised facts. This paper argues that such tests are not extensive enough and proposes to evaluate the models using standard econometric procedures. Specifically it is argued that these models should be studied by eliciting the restricted VAR representation underlying them and comparing it with the VAR estimated in an unrestricted way from the underlying data. Allowance is made for cases where the driving forces are ...