The Right Fit for the Wrong Reasons: Real Business Cycle in an Oil-Dependent Economy

Abstract:

Venezuela has an oil-dependent economy subject to large exogenous shocks and a rigid labor market. These features go straight to the heart of two weaknesses of real business cycle (RBC) theory widely reported in the literature: neither shocks are volatile enough nor real salaries suf ficiently flexible as required by the RBC framework to replicate the behavior of the economy. We calibrate a basic RBC model and compare a set of relevant statistics from RBC-simulated time series with actual data for Venezuela and the benchmark case of the United States (1950–2008). Despite Venezuela being a heavily regulated economy, RBC-simulated series provide a good fit, in particular with regard to labor markets.

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