THE ROLE OF ENERGY IN REAL BUSINESS-CYCLE MODELS

This paper modifies Hansen's (1985) analysis of a real business cycle model with indivisible labor by explicitly including energy as a productive input and modelling the relative price of energy as an exogenous random process. One goal is to determine the extent to which the introduction of energy price shocks reduces the reliance of the real business cycle model on unobserved technology shocks. The other goal, following Christiano and Eichenbaum (1991), is to compare the correlation between real wages and hours predicted by the energy-inclusive model to that predicted by Hansen's model.