RBC: Impulse/ Amplification/ Propagation Mechanism

1. Impulse Mechanism

Exogenous variables in RBC models.

In the standard RBC models, the technology shock is only considered for impulse mechanisms. The standard RBC models generate the high correlation between productivity and labor; however, in the data this correlation is close to zero. In response to this problem, the introduction of government expenditure shocks, household production shocks, distortionary tax shock, etc. are considered.

Only technology shock means that in the labor market the labor demand is only affected by the shock, which generates the high correlation between productivity and labor. In order to weaken the correlation, some shocks which affect the labor supply is needed.


2. Amplification Mechanism

Typically the labor response but also could include variable capacity utilization of capital.

Hansen 1985 Indivisible Labor and the Business Cycle
"Unlike previous equilibrium models of the business cycle, this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity."

http://www.sciencedirect.com/science/article/pii/030439328590039X


3. Propagation Mechanism

Typically the consumption and investment response to smooth the consumption path.

Cogley and Nason 1995 Output Dynamics in Real-Business-Cycle Models
"Many RBC models have weak internal propagation mechanisms and must rely
on external sources of dynamics to replicate both facts. Models that incorporate
labor adjustment costs are partially successful. They endogenously generate
positive autocorrelation in output growth, but they need implausibly large
transitory shocks to match the trend-reverting component in output."

"Robert E. Lucas and Thomas J. Sargent (1981) noted that capital accumulation and costs of adjustment could turn serially uncorrelated shocks into serially correlated movements in output. Although RBC theorists have explored this idea in great detail, the propagation mechanisms embodied in current models do not generate the right kind of output dynamics. Our results suggest that RBC theorists ought to devote further attention to modeling internal sources of propagation."

http://ideas.repec.org/a/aea/aecrev/v85y1995i3p492-511.html