Survey of modern business cycle theory

Abstract

Modern business cycle theory is a key area in macroeconomics. After Samulson published his multiplier-accelerator model in 1939, see Samuelson (1939), business cycle theorists have devoted their attention to constructing mathematical models which are able to replicate fluctuations in economic activity. The models differ widely, in ways that reflect their authors’ school of thought. The aim of the present chapter is to provide a survey of modern business cycle theories. In order to do this, the models have will be divided into two groups depending on their view on economic stability. In the first group the economy is seen as inherent stable. Market forces lead automatically to a (unique) steady state and economic fluctuations are seen as temporary deviations from a steady state or a steady state growth path, disturbed either by exogenous forces or the government. The price mechanism works. In the second group, we have models which doubt economic stability, economic fluctuations are an endogenous phenomenon or market failures prevent the economy from an automatic tendency towards a steady state. The working of a price mechanism is questioned. It will be seen in more detail when analysing the models that economic stability is rather assumed than derived endogenously. The fact that economic stability is a matter of assumption and the fact that both approaches are incompatible is the reason for taking economic stability as the main distinguishing property.