ABSTRACT
Prescott, Summers, and Rogoff The Prescott-Summers “debate” is well known, and often cited (Prescott 1986b, c; Summers, 1986). What is important to recall here is that their initial exchange took place at the Summer meeting of the NBER Economic Fluctuations Group held in Cambridge, Massachusetts, in July 1986. According to the summary of the meeting that appeared in the NBER Reporter (Fall 1986, 22-23), Taylor and Mankiw organized the program. It included papers by Bernanke and Gertler, Greenwald and Stiglitz, Hartley and Walsh, Dornbusch and Fischer, Zeides, and Prescott, who presented his paper “Theory Ahead of Business Cycle Measurement.” The discussants of the papers were Stephen King, Woodford, Robert King, Lucas, Hall, and Summers, who discussed Prescott’s paper (NBER Reporter, 1986, 23). The account of Prescott’s paper in the NBER Reporter is as follows (NBER Reporter 1986, 23):
Models of economic growth and technological change were originally developed to explain secular changes in economic activity. Prescott argues that simple modifications of these growth models can be used to explain post-war U.S. cyclical behavior as well. Prescott combines a production function involving capital, labor, and a random technological disturbance, and an inter-temporal utility function involving consumption goods and leisure, to produce a simple dynamic general equilibrium model. By specifying a set of parameters of the production function, the utility function, and the stochastic process of technological change, data can be generated from the “artificial economy”. Prescott chooses a set of parameters that are consistent with microdata and long-term relationships between the data. He finds that the artificial data generated display the same type of business cycle behavior found in the post-war U.S. economy.
