Real Business Cycles and the Lucas Paradigm

Abstract

When the Lucas paradigm is generalized to include real effects, the effects of real factors and monetary factors on the business cycle are always interrelated. Furthermore, in such models monetary factors can affect the long-run behavior or real output, contrary to the commonly held view that they can't. Real business cycle models and Lucas-type models are different paradigms not in the sense of real versus monetary, but in the interrelation- ships between real and monetary factors intrinsic to the Lucas paradigm as contrasted to the dichotomy between real and monetary factors implied by the real business cycle literature.