Business Cycle


Real Business Cycle theory - Structural variables



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Real Business Cycle theory - Structural variables

  • Crucial to RBC models, plausible values for structural variables such as the discount rate, and the rate of capital depreciation are used in the creation of simulated variable paths



Real Business Cycle theory - Criticisms

  • Real business cycle theory is a major point of contention within macroeconomics : RBC theory categorically rejects Keynesian economics and the real effectiveness of monetarism, which are the pillars of mainstream economics|mainstream macroeconomic policy, while such noted mainstream economists as Larry Summers and Paul Krugman categorically reject RBC theory in turn:



Real Business Cycle theory - Criticisms

  • :(My view is that) real business cycle models of the type urged on us by [Ed] Prescott have nothing to do with the business cycle phenomena observed in the United States or other capitalist economies. –



Real Business Cycle theory - Criticisms

  • However, technology-based theories of real business cycles also imply that consumers will change their intertemporal consumption and savings decisions based on the real interest rate available to them, which is a shift in demand



Real Business Cycle theory - Criticisms



Real Business Cycle theory - Criticisms

  • * Prescott uses incorrect parameters (one third of household time devoted to market activity rather than one sixth; historical real interest rates of 4% rather than 1%);



Real Business Cycle theory - Criticisms

  • * absence of independent evidence for the technology shocks that supposedly cause the business cycle, and notably being unable to point to technological causes of observed recessions;



Real Business Cycle theory - Criticisms

  • * Prescott ignores exchange failures (e.g., failures of factories to trade their goods for workers' labor), which are central to Keynesian accounts of the causes of the Great Depression, among other crises.



Inventory investment - Inventory investment over the business cycle

  • Starting from some point in the business cycle, some group (consumers, government, purchasers of exports, etc.) decides for some reason to have a sustained increase in their spending



Inventory investment - Inventory investment over the business cycle



Inventory investment - Inventory investment over the business cycle

  • At some point, there is a sustained increase in some type of spending for some reason



Joseph Schumpeter - Business cycles

  • The theory of economic development : an inquiry into profits, capital, credit, interest, and the business cycle translated from the German by Redvers Opie (1961) New York: OUP with a treatise of circular flow which, excluding any innovations and innovative activities, leads to a stationary state



Joseph Schumpeter - Business cycles

  • The entrepreneur disturbs this equilibrium and is the prime cause of economic development, which proceeds in cyclic fashion along several time scales. In fashioning this theory connecting innovations, cycles, and development, Schumpeter kept alive the Russian Nikolai Kondratiev's ideas on 50-year cycles, Kondratiev waves.



Joseph Schumpeter - Business cycles



Economic policy - Business cycles

  • The business cycle became a predominant issue in the 19th century, as it became clear that industrial output, employment, and profit behaved in a economic cycle|cyclical manner. One of the first proposed policy solutions to the problem came with the work of Keynes, who proposed that fiscal policy could be used actively to ward off depressions, recessions and slumps. The Austrian school argues that central banks create the business cycle.



Friedrich Hayek - The business cycle

  • In his Prices and Production (1931), Hayek argued that the business cycle resulted from the central bank's inflationary Credit cycle|credit expansion and its transmission over time, leading to a capital misallocation caused by the artificially low interest rates



Friedrich Hayek - The business cycle

  • Hayek's analysis was based on Eugen Böhm von Bawerk|Böhm-Bawerk's concept of the average period of productionSee the chapter [http://books.google.com/books?id=fkVHIn8y8qkCpg=PA7 The collaboration with Keynes and the controversy with Hayek,], Heinz D



Friedrich Hayek - The business cycle

  • According to Nicholas Kaldor, Hayek's theory of the time-structure of capital and of the business cycle initially fascinated the academic world and appeared to offer a less facile and superficial understanding of macroeconomics than the Cambridge school's.






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