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!


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

    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.

  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.

    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.