02203cas a2200241 a 4500 AALejournalIMF017906 230101c9999 xx r poo 0 0eng d 5.00 USD 9781484318584 1018-5941 BD-DhAAL BD-DhAAL Plotnikov, Dmitry. What Prevents a Real Business Cycle Model from Matching the U.S. Data? : Decomposing the Labor Wedge / Dmitry Plotnikov. Washington, D.C. : International Monetary Fund, 2017. 1 online resource (35 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students I carry out a business cycle accounting exercise (Chari, Kehoe and McGrattan, 2007) on the U.S. data measured in wage units (Farmer (2010)) for the entire postwar period. In contrast to a conventional approach, this approach preserves common medium-term business cycle fluctuations in GDP, its components and the unemployment rate. Additionally, it facilitates decomposition of the labor wedge into the labor supply and the labor demand wedges. Using this business cycle accounting methodology, I find that in the transformed data, most movements in GDP are accounted for by the labor supply wedge. Therefore, I reverse a key finding of the real business cycle literature which asserts that 70% or more of economic fluctuations can be explained by TFP shocks. In other words, the real business cycle model fits the data badly because the assumption that households are on their labor supply equation is flawed. This failure is masked by data that has been filtered with a conventional approach that removes fluctuations at medium frequencies. My findings are consistent with the literature on incomplete labor markets. Mode of access: Internet IMF Working Papers; Working Paper ; No. 2017/201 Full text available on IMF http://elibrary.imf.org/view/journals/001/2017/201/001.2017.issue-201-en.xml IMF e-Library