ȁȃȁ Partʺ: EconomicsAn article by Hansen and Prescott (ȀȈȈȂ) provides a partial exception
to the observation that real-business-cycle theorists do not identify the
“real” shocks that their theory presupposes. Ultimately, though, the partial
nature of that exception supports the observation. Without explicitly say-
ing so, Hansen and Prescott convey the impression that they are answering
“yes” to the question posed by their title, “Did Technology Shocks Cause
theȀȈȈǿ–ȀȈȈȀRecession?”, thus invoking that episode in support of their
theory. In their concluding paragraph (p.ȁȇȅ) they say: “Of course, if
technology shocks continue to be above average, the United States will
experience a boom; if the shocks in the coming year are below average,
we can expect a recession.” Earlier (e.g., p.ȁȇȃ), they say that their model
economy had a recession roughly matching that of the actual economy in
timing, magnitude, and duration.
Hansen and Prescott’s method was to construct a model economy,
modified from the standard real-business-cycle model and calibrated with
figures from the real world. Ļey calculate supposed productivity or tech-
nology parameters from employment data and other macroeconomic
figures. Ļey find that fluctuations of the model and actual economies
match each other fairly well, except for stronger and more rapid reac-
tions to productivity shocks and faster recovery from the recession in the
model than in the real world. (Robert Clower’s “major objection to the
new classical economics,” comes to mind: “it equates theoretical progress
with improved econometric performance of theoretical models rather than
with enhanced understanding of the way in which decentralized economic
systems work.”ȀȈȇȃ, p.ȁȆȁ.)
Lacking space to describe their procedures in detail, Hansen and
Prescott nevertheless convey the impression that sophisticated technique
went into reaching their results, as if that very fact recommends them.
Despite entitling one section “What Are Ļese Technology Shocks?”
(pp.ȁȇǿ–ȁȇȁ), the authors do not actually name the supposed causes
of recession. At most they hint that antipollution regulations may have
been involved. Ļis style of exposition—conveying impressions rather
than mustering explicit evidence and argument—requires comment that
I nevertheless refrain from providing here, except to point out an
example of tacit cheerleaders for rigor arguing in quite a nonrigorous
way.
Philip Cagan reviews studies that manage to avoid detecting the influ-
ence of monetary changes on output (ȀȈȇȈ, followed by comments by
Robert Rasche and others). Cagan criticizes the regression techniques