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Real myths and a monetary fact

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In their paper 'Business cycles: real facts and a monetary myth,' Kydland and Prescott (Federal Reserve Bank of Minneapolis Quarterly Review, 14, 1990) present a series of statistics, generated by using the Hodrick-Prescott filter, which they define as the 'business cycle facts.' Prescott ( Federal Reserve Bank of Minneapolis Quarterly Review, 10, 1986) argued that the facts are immune to the method of detrending; however, even if we use the Hodrick-Prescott filter, we can get a set of facts that differ in important ways from those in Kydland and Prescott (1990). In particular, we can generate the conventional wisdom that real wages are acyclical, very different relative volatilities of consumption, investment and output, and M1 leading the cycle. In addition, we note that the other important fact generated by Kydland and Prescott, the countercyclicality of prices, was not actually a new result.
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Document Type: Research Article

Publication date: 1999-11-01

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