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The Real Business Cycles Approach

In: Competing Schools of Economic Thought

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  • Lefteris Tsoulfidis

    (University of Macedonia)

Abstract

Up until now, we discussed the way in which the New Classical (henceforth, NC) economics restored and brought to centre stage the idea of cyclical fluctuations on the basis of the assumption of continuous market clearing in all markets and the rational expectation hypothesis that characterises the behaviour of the economic agents. According to NC economists, the lack of adequate information on the difference between relative prices and the general price level as well as the monetary shocks constitutes the major causes of fluctuations in the real GDP. This explanation of the source of business fluctuations, on the one hand, questioned the Keynesian orthodoxy and, on the other hand, paved the way for the emergence of the Real Business Cycles (henceforth, RBC) and the New Keynesian economics. This chapter begins with a history of the discussion of business cycles and continues with the major characteristics of the RBC approach, while the causes (real or monetary) of business cycles and the separation of cycles from growth (trend) follow. A short description of the RBC simulation models as well as the policy implications of the real business cycles is the next topic, and the chapter concludes with a summary and some critical remarks about the approach that has attracted a lot of attention at least up until the outbreak of the crisis of 2008.

Suggested Citation

  • Lefteris Tsoulfidis, 2009. "The Real Business Cycles Approach," Springer Books, in: Competing Schools of Economic Thought, chapter 0, pages 343-361, Springer.
    • Handle: RePEc:spr:sprchp:978-3-540-92693-1_15
    DOI: 10.1007/978-3-540-92693-1_15
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