Do Equilibrium Real Business Cycle Theories Explain Postwar US Business Cycles?

This article presents and interprets some new evidence on the validity of the real business cycle (RBC) approach to business cycle analysis. The analysis is conducted in the context of a monetary business cycle model that makes explicit one potential link between monetary policy and real allocations. This model is used to interpret Granger causal relations between nominal and real aggregates. Perhaps the most striking empirical finding is that money growth does not Granger cause output growth in the context of several multivariate VARs and for various sample periods during the postwar period in the United States. Several possible reconciliations of this finding with both real and monetary business cycle models are discussed. We find that it is difficult to reconcile our empirical results with the view that exogenous monetary shocks were an important independent source of variation in output growth.