Knowra Real business cycle theory Real business cycle theory Real business cycle theory explains economic fluctuations as efficient responses to real shocks, especially changes in productivity, rather than as failures caused by monetary disturbances or nominal rigidities.
Technology shock : An unexpected change in the methods or knowledge available for producing goods and services. A productivity change shifts the production possibilities that drive fluctuations in the theory.
Finn E. Kydland : A Norwegian-American economist who studied time consistency, business cycles, and dynamic macroeconomic models. His work with Prescott established a benchmark quantitative approach to business-cycle analysis.
Keynesian economics : An economic tradition emphasizing aggregate demand, price or wage rigidities, and policies that can stabilize output. Unlike real business cycle theory, Keynesian accounts commonly treat recessions as inefficient shortfalls in demand.
Calibration (economics) : A method that assigns model parameters values drawn from microeconomic evidence or other empirical sources. Real business cycle research made calibration prominent as a way to assess whether models reproduce aggregate data.
Representative agent : A modeling device that represents an economy’s households or firms as one optimizing decision-maker. The canonical model uses one household to choose work, consumption, and saving over time.
Edward C. Prescott : An American economist known for research on business cycles, policy, and dynamic economic models. His collaboration with Kydland helped launch modern real business cycle theory.
New Keynesian economics : A macroeconomic framework combining optimizing behavior with nominal rigidities that can make monetary policy affect real activity. It retains equilibrium modeling while rejecting the claim that fluctuations generally reflect efficient responses to real shocks.
Business cycle accounting : A method that represents economic distortions as wedges in productivity, labor, investment, and government spending. It extends the theory’s quantitative approach while allowing observed cycles to reflect more than technology shocks.
Intertemporal substitution : The reallocation of consumption or labor across time in response to changes in relative prices or returns. Wage changes lead households to shift labor between periods, amplifying shock-driven employment movements.
Time to Build : A 1982 paper by Finn Kydland and Edward Prescott introducing a model with time-consuming investment and productivity shocks. It showed how a calibrated equilibrium model could reproduce several features of observed cycles.
Show all 21