Discussion Paper No. 1499 questions the usefulness of evidence generally provided in support of real business cycle (RBC) models, which stresses their apparent ability to match some statistical properties of the data and, in particular, the patterns of unconditional second moments of key macroeconomic time series. Jordi Galí shows how a simple 'New Keynesian' model with monopolistic competition, nominal rigidities and variable effort may reverse the sources of the employment-productivity comovements, by predicting that technology shocks generate a negative correlation between those variables, offset by the positive comovement arising from demand shocks.

Three empirical results stand out in the majority of G7 countries, of which data were used: First, estimated conditional correlations of employment and productivity are negative for technology shocks, and positive for demand shocks. Second, impulse responses show a persistent decline in employment in response to a positive technology shock. Third, measured productivity increases temporarily in response to a positive demand shock. This evidence is clearly at odds with the predictions of standard RBC models, but consistent with the class of 'New Keynesian' models mentioned above, of which a stylized version is analysed in the paper.

Technology, Employment and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?
Jordi Galí