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Business cycles
This note outlines and discusses some of the strands in the post-Keynesian literature on business cycles. Most post-Keynesians have focused on endogenously generated cycles, but the mechanism varies: some focus on the goods market, others on financial markets, the labor market, or political intervention. The merits of formal modeling of the cycles have also come in for debate. JEL Categories:
Noisy Business Cycles
This paper investigates a real-business-cycle economy that features dispersed information
about the underlying aggregate productivity shocks, taste shocks, and—potentially—shocks to
monopoly power. We show how the dispersion of information can (i) contribute to significant
inertia in the response of macroeconomic outcomes to such shocks; (ii) induce a negative shortrun
response of employment to productivity shocks; (iii) imply that productivity shocks explain
only a small fraction of high-frequency fluctuations; (iv) contribute to significant noise in the
business cycle; (v) formalize a certain type of demand shocks within an RBC economy; and
(vi) generate cyclical variation in observed Solow residuals and labor wedges. Importantly, none
of these properties requires significant uncertainty about the underlying fundamentals: they
rest on the heterogeneity of information and the strength of trade linkages in the economy, not
the level of uncertainty. Finally, none of these properties are symptoms of inefficiency: apart
from undoing monopoly distortions or providing the agents with more information, no policy
intervention can improve upon the equilibrium allocations
Real business cycles
Real business cycles are recurrent fluctuations in an economy's incomes, products, and factor inputs - especially labor - that are due to nonmonetary sources. These sources include changes in technology, tax rates and government spending, tastes, government regulation, terms of trade, and energy prices. Most real business cycle (RBC) models are variants or extensions of a neoclassical growth model. One such prototype is introduced. It is then shown how RBC theorists, applying the methodology of Kydland and Prescott (Econometrica 1982), use theory to make predictions about actual time series. Extensions of the prototype model, current issues, and open questions are also discussed.Business cycles
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