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Friday, November 16, 2012

Real Business Cycle Theory: A Misnomer?

In my continuing research into theories of cycles in social life, I have been reading up on real business cycle theory, and it seems to me the name is a misnomer. It really ought to be "illusory business cycle theory," as the main thrust of the idea is that there actually isn't any such thing as a business cycle at all: instead, there are a series of exogenous shocks to the economy the give the illusion of a genuine cycle. Nothing returns the system to an earlier state at which a cycle starts over, except that enough random jiggling around, in a system that exhibits hysteresis, will create cycle-like behavior.

UPDATE: Noah Smith makes the same point here: there is no cycle in RBC.

UPDATE II: Pulled from Smith's comments: "Economists who support RBC could be publicly shamed by those who want to actually do science.

UPDATE III: And just to be clear, a model of a "genuine" cycle would be something like the predator-prey model. It is a true cycle model because factors endogenous to the model drive the cyclical pattern. And these are surely quite "real" factors at work: getting eaten by a fox is about as real as it gets!

4 comments:

  1. The methodology is identical to New Keynesian methodology. I don't get the point. Would you prefer "not-nominal" business cycle theory?

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    1. I'm not sure why you don't "get the point," but it is clear you don't: the issue is not in the least real-vs-nominal. It is that there is no cycle in RBC.

      But since I apparently was unclear, here is Noah Smith making the same point.

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  2. I agree with your assessment. There is no cycle. There are only bubbles. At any particular moment a bubble is either being inflated, or a bubble is bursting, or we are living in a temporary inter-bubble period during which politicians and bankers are conniving to begin the inflation of the next bubble.

    I see that we are currently experiencing the inflation of a massive bond market bubble, coupled with a huge armaments/war-industry bubble. The sooner these insane bubbles burst the better off productive, honest, peaceful people will become.

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    1. Well, bestquest, what I'm saying is, IN RBC, there is no cycle."

      At this point I am trying to do a taxonomy of cycle theories (including those that say there is no cycle!). I am not trying to decide which are right and which are wrong. Yet.

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