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New Classical Economics and Real Business Cycle Theory

In: Critique of the New Consensus Macroeconomics and Implications for India

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  • Dilip M. Nachane

    (Indira Gandhi Institute of Development Research)

Abstract

This chapter is devoted to two important schools of thought, viz. new classical economics and real business cycle theory which rose to prominence in the late 1970s. The new classical school shares with Friedman’s monetarism, three features—a profound belief in the self-corrective properties of markets and a corresponding distrust of Keynesian interventionist policies (widely prevalent in the late 1960s and 1970s), a denial of the existence of a long-run trade-off between inflation and unemployment along a Phillips curve, and a recognition of the important role played by agents’ expectations in macroeconomic outcomes. Real business cycle theory usually associated with the names of Prescott, Kydland, Plosser, Long, etc., builds on a line of earlier thinking, associated on the one hand with the impulse and propagation mechanisms of business cycles due to Frisch and Slutzky, and on the other with the neoclassical growth model of Solow.

Suggested Citation

  • Dilip M. Nachane, 2018. "New Classical Economics and Real Business Cycle Theory," India Studies in Business and Economics, in: Critique of the New Consensus Macroeconomics and Implications for India, chapter 0, pages 61-81, Springer.
    • Handle: RePEc:spr:isbchp:978-81-322-3920-8_3
    DOI: 10.1007/978-81-322-3920-8_3
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