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Time to Build and Aggregate Fluctuations

Finn E. Kydland and Edward C. Prescott
Econometrica
Vol. 50, No. 6 (Nov., 1982), pp. 1345-1370
Published by: The Econometric Society
DOI: 10.2307/1913386
Stable URL: http://www.jstor.org/stable/1913386
Page Count: 26
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Time to Build and Aggregate Fluctuations
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Abstract

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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