Real business cycle theory

The real -business -cycle theory ( RBC theory, theory of real business cycles ) is a school of thought of macroeconomics. She argues that business cycles are primarily caused by real shocks, such as changes in the available technology.

Other theories see the cause of economic fluctuations in contrast, fluctuations in demand ( Keynesian ) or as a result of government intervention (such as discretionary fiscal policy or monetary policy ) in the economic cycle ( monetarism ).

Representative

The most important representative of the real -business -cycle theory are Edward C. Prescott and Finn E. Kydland, the jointly received the Nobel Prize in Economics in 2004. Other key figures are Robert J. Barro, Robert G. King, Charles Plosser and Sergio Rebelo.

Methodology

Methodologically, the school of real business cycle theory is based closely on Robert E. Lucas developed in the 1970s, dynamic general equilibrium model. The models go from the sense of a micro-foundation of representative economic agents. From the utility functions of households and the profit functions of the company as well as their constraints ( constraints) general equilibrium conditions are derived that characterize the economic dynamism. This is in contrast to older macroeconomic schools, such as the Keynesian or monetarist.

Central concepts

One of the central concepts of the real -business -cycle theory, the postulate of rational expectations, market clearing consulted in the context of a Walrasian equilibrium model and provide representative economic agents. Shocks on the available technology provide for fluctuations in GDP, which is called the business cycle. Empirically, the representatives underpin this with the realization that the GDP a random walk ( random motion ) follows. This result was first published in 1982 by Charles Nelson and Charles Plosser in the Journal of Monetary Economics and caused a great sensation. In order for the school of the theory of real business cycles is closely related to the modern time series analysis, which was developed since the 1970s, among other things, by Christopher Sims. Another key assumption concerns the intertemporal substitution of labor. It is assumed that households work at low wages (for example, during a recession ) less to much to work with a high salary ( during a boom ).

Criticism

Among the main points of criticism heard that a very high intertemporal elasticity of substitution of labor supply must be assumed, which was microeconomically often disproved. Another point are negative technology shocks, their causes and empirical existence remain unclear.

Nevertheless, modern macroeconomics has integrated many concepts of the theory of real business cycles. This includes in particular the methodology of dynamic general equilibrium models, the concept of rational expectations and greater attention to the supply side of the economy.