How powerful are “Real Business Cycle” models for explaining fluctuations in Spain and the UK?

Abstract

This thesis aims to assess the predictions of standard neoclassical Real Business Cycle models for Spain and the United Kingdom by comparing statistical moments that describe real business cycles and the empirical moments. For this, I present the neoclassical theory of business cycles and its modelling methodology. I continue showing how I derive the model used. Then, I undertake modifications of the model in order to relax some of the stringent neoclassical assumptions for the purpose of checking if these extensions help the model better fit the data for these countries. Out of the most appropriate extensions, I put together a final model so to compare the standard version with an extended version of the Neoclassical model. Moreover, I explain how to translate the theoretical mechanisms described into an empirical exercise for Spain and the UK. I later discuss the results I obtain and its intuition behind. Finally, I evaluate the results in order to conclude which model extension is most appropriate for the countries analysed.