Testing between Competing Models of Real Business Cycles

• Published in: International economic review (Philadelphia) Vol. 32; no. 3; pp. 669 - 688
• Main Authors: Osano, Hiroshi, Inoue, Tohru
• Format: Journal Article
• Language: English
• Published: Philadelphia, Pa The Economics Department of the University of Pennsylvania, and the Osaka University Institure of Social and Economic Research Association 01-08-1991; University of Pennsylvania, Economics Dept., and Osaka University Institute of Social and Economic Research; Blackwell Publishing Ltd
• Subjects: Business cycles; Comparative studies; Economic fluctuations; Economic models; Economic statistics; Economic theory; Efficiency; Employment; Euler equations; Labor; Labor contracts; Labor supply; Long term; Marginal productivity; Real wages; Regression analysis; Wages; Wages & salaries; Work hours; Japan
• ISSN: 0020-6598; 1468-2354
• DOI: 10.2307/2527113

This paper tests a real business cycle model with efficient long-term labor contracts (the efficient long-term contract model) against a standard real business cycle model (the intertemporal substitution model). In the former model, employment and real wages are determined by bilateral dynamic bargaining between firms and workers. In the latter model, employment and real wages are determined instead by the dynamic optimization of households within the competitive market framework. We estimate each model using aggregate Japanese data. Our results show that the data are consistent with the efficient long-term contract model, but are inconsistent with the intertemporal substitution model.