Thursday, April 11, 2013

More Thoughts on Real Business Cycle Theory

Real business cycle essentially denies that any true macro economic phenomena exist. We have a collections of representative agents optimizing in response to exogenous shocks. One selling point of the theory is that it lends itself to DSGE models, where we have an economy always in equilibrium being bumped hither and thither by the shocks: we can easily give microfoundations to our macroeconomics  because there really is no macroeconomics per se. It is only the fact that the responses to these shocks display hysteresis that gives rise to the appearance of business cycle; as F.H. Bradley would have put it, the business cycle in RBC is appearance, not reality.

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