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Monday, September 01, 2014

Real business cycle theory is not a cycle theory at all

I have pointed this out before, and got some flack for saying it, which is surprising given the fact that RBC proponents have boasted of this as a feature of their theory. Anyway, here is Noah Smith making this point:

"In fact, RBC is really sort of a giant null hypothesis -- a claim that the phenomenon known as the business cycle is just an illusion, and that recessions are the normal, smooth functioning of an efficient economy."

4 comments:

  1. Here is Rush Limbaugh making that point: After the Reagan years,

    "George Bush came along and, seeking to get along with the Democrats in the interest of smooth government, changed course -- at least economically. He betrayed the most important political promise he ever made and made a huge political sacrifice in the process, and ended up compounding a cyclical recession.
    "Liberals then brilliantly took the natural cycle of recession and blamed it completely on the 1980s..."
    (emphasis added)
    From: See, I Told You So (1994)

    And here is Newt Gingrich making that point:

    "The so-called business cycle is in large part a product of the theories of American economists. Since their theories predict that economic recession will always follow growth, they will advise the Federal Reserve Board to follow policies that slow growth and increase rates, that in turn will choke off the growth and lead to recession."
    From: To Renew America (1995)

    I've been waiting a long time to share those bits.

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  2. Oh, and the big gun:
    "In one respect the [Federal Reserve] System has remained completely consistent throughout. It blames all problems on external influences beyond its control and takes credit for any and all favorable occurrences. It thereby continues to promote the myth that the private economy is unstable, while its behavior continues to document the reality that government is today the major source of economic instability."
    Milton Friedman, Free to Choose, Chapter 3, last paragraph.

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  3. Noah´s right:
    http://thefaintofheart.wordpress.com/2014/08/28/is-rbc-theory-winning-out/

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  4. I agree with this post, Gene.

    ReplyDelete