Real Business Cycles
Real business cycles are recurrent fluctuations in an economy’s incomes, products, and factor inputs – especially labour – that are due to non-monetary sources. These sources include changes in technology, tax rates and government spending, tastes, government regulation, terms of trade and energy prices. Most real business cycle (RBC) models are variants or extensions of a neoclassical growth model. One such prototype is introduced. It is then shown how RBC theorists, applying the methodology of Kydland and Prescott (Econometrica 50:1345–1370, 1982), use theory to make predictions about actual time series. Extensions of the prototype model, current issues and open questions are also discussed.
KeywordsCompetitive equilibrium Depreciation Great depression Home production Household budget constraint International business cycles Labour supply Labour-market search Markov processes Monetary shocks Productivity shocks Real business cycles Real exchange rates Regulation Research and development Stabilization policies Stochastic growth models Technical change Technology shocks Terms of trade Total factor productivity Unemployment
I wish to thank Gary Hansen, Lee Ohanian and Ed Prescott for their comments on an earlier draft. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
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