Econometrica: Nov 1982, Volume 50, Issue 6

Time to Build and Aggregate Fluctuations

https://doi.org/0012-9682(198211)50:6<1345:TTBAAF>2.0.CO;2-E
p. 1345-1370

Edward C. Prescott, Finn E. Kydland

The equilibrium growth model is modified and used to explain the cyclical variances of a set of economic time series, the covariances between real output and the other series, and the autocovariance of output. The model is fitted to quarterly data for the post-war U.S. economy. Crucial features of the model are the assumption that more than one time period is required for the construction of new productive capital, and the non-time-separable utility function that admits greater intertemporal substitution of leisure. The fit is surprisingly good in light of the model's simplicity and the small number of free parameters.

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