So, our real business cycle model cannot simultaneously generate a rise in the price of capital and a rise in investment, in response to a signal about future produc- tivity. The real business cycle model has two additional shortcomings. It generates an extremely large jump in the real interest rate and it generates very little per- sistence. It really only generates a boom-bust pattern in consumption, investment, employment and output when the signal is about a shock that will occur four quar- ters in the future. If the signal is about a shock, say, 12 quarters in the future, agents go on an 8 quarter vacation and.
