Comment on Gali and Rabanal’s “Technology Shocks and Aggregate Fluctuations: How Well Does the RBC Model Fit Postwar U.S. Data?”∗

Gali and Rabanal provide statistical evidence that, in their view, puts into question the real businesscycle paradigm in favor of the sticky-price paradigm. I demonstrate that their statistical procedure is easily misled in that they would reach the same conclusions even if their data had been simulated from an RBC model. I also demonstrate that sticky-price models do a poor job generating U.S.-like business cycles with only shocks to technology, the federal funds rate, and government consumption. This explains why Gali and Rabanal need large unobserved shocks to preferences and to the degree of monopoly power. ∗This discussion was prepared for the 2004 NBER Macroeconomics Annual. I received very helpful comments from my colleagues at the Federal Reserve Bank of Minneapolis. Data, codes, and notes used in this project are available at my website (minneapolisfed.org/research). The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.