Real business cycle theory

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The theory of real business cycles (English real business cycle theory ) is a school of thought of the new classical macroeconomics . She postulates that the principle of the “classic dichotomy” also applies in the short term and that economic fluctuations can thus be explained by changes in the real economy (for example employment or real gross national product). She argues that economic cycles by technological shocks caused.

Other theories see the cause of economic fluctuations, however in demand fluctuations ( Keynesianism ), of missing the optimal money supply as a result of misguided monetary policy ( monetarism ), or as a supply or excess demand due to price and wage rigidities ( New Keynesian Economics ).

Representative

The most important proponents of the theory of real business cycles are Edward C. Prescott and Finn E. Kydland , who were jointly awarded the Alfred Nobel Memorial Prize for Economics in 2004 . Other central figures are Robert J. Barro , Robert G. King , Charles Plosser and Sergio Rebelo.

methodology

Methodologically, the school of theory of real business cycles is closely based on the dynamic general equilibrium model developed by Robert E. Lucas in the 1970s . The models are based on a microfoundation of representative economic subjects . From the utility functions of the household and the profit functions of the company and their constraints ( constraints general equilibrium conditions are derived) that characterize the economic dynamism. This is in contrast to older macroeconomic schools, such as the Keynesian or Monetarist.

Central concepts

The central concepts of the theory of real business cycles include the postulate of rational expectations , market clearance within the framework of a Walrasian equilibrium model and, of course, representative economic subjects. Shocks to available technology cause GDP to fluctuate in what is known as the business cycle. Empirically representatives to back this up with the realization that GDP a random walk ( random walk ) follows. This finding was first published in 1982 by Charles Nelson and Charles Plosser in the Journal of Monetary Economics , and it caused quite a stir. The school of theory of real business cycles is thus closely linked to modern time series analysis , which has been developed by Christopher Sims among others since the 1970s . Another central assumption concerns the intertemporal substitution of work. It is assumed that households with low wages (e.g. during a recession ) work less, whereas with high wages (during a boom) they work hard.

criticism

Economists like Greg Mankiw and Lawrence Summers criticize the theory of real business cycles. It is based on the following three assumptions, which it believes are unrealistic:

1. Technology shocks are at the center of this business cycle theory.

Apart from the oil price shock in the 1970s, the inventor of the theory Edward Prescott is unable to name specific technology shocks that are said to have played a role in historical economic fluctuations. In addition, there is no microeconomic foundation for the major technology shocks that this theory presupposes. Furthermore, the theory of real business cycles is regularly not tested against alternative explanations. In most cases, however, there are very plausible alternative explanations.

2. Unemployment arises because people choose to work less.

Paul Krugman comments critically that after this assumption, the drastic rise in US unemployment during the Great Depression (at its peak there was an unemployment rate of 25%) was based on this view on a mass decision to take a long vacation.

3. Monetary policy cannot influence the course of the economy.

Today there is broad consensus, even among economists of the New Classical Macroeconomics, that wages and prices do not adjust as quickly as necessary to restore the balance between supply and demand. The hypothesis of the ineffectiveness of monetary policy is therefore hardly supported nowadays.

Another major criticism is that the theory of real business cycles is not able to map the business cycle in the United States. Larry Summers therefore wrote:

"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."

"In my opinion, there is no connection between the real business cycle models as they were forced upon us by Ed Prescott and the economic developments that can be observed in the USA or any other capitalist economy."

- Lawrence Summers

literature

  • Brian Snowdon, Howard R. Vane: Modern Macroeconomics . Edward Elgar, Cheltenham, UK and Northampton, MA, USA 2005, ISBN 1-84542-208-2 (English).
  • Charles I. Plosser: Understanding Real Business Cycles . In: Journal of Economic Perspectives . tape 3 , no. 3 , 1989 (English).
  • N. Gregory Mankiw: Macroeconomics . Gabler Verlag, 1993, ISBN 978-3-409-16013-1 , doi : 10.1007 / 978-3-322-85881-8_14 (especially Chapter 14: The theory of real business cycles).

Individual evidence

  1. ↑ Alvaro Cencini: Macroeconomic Foundations of Macroeconomics . Routledge, 2012, ISBN 978-1-134-38223-1 , p. 40.
  2. ^ A b c Lawrence H. Summers : Some Skeptical Observations on Real Business Cycle Theory . In: Federal Reserve Bank of Minneapolis Quarterly Review . tape 10 , no. 4 , 1986, pp. 23–27 (English, minneapolisfed.org [PDF]).
  3. ↑ George W. Stadler: Real Business Cycles . In: Journal of Economics Literature . Vol. XXXII, December 1994, pp. 1750–1783 (English, ucdavis.edu [PDF]). Here p. 1772.
  4. ↑ a b Kevin Hoover : New Classical Macroeconomics , econlib.org
  5. ↑ George W. Stadler: Real Business Cycles . In: Journal of Economics Literature . Vol. XXXII, December 1994, pp. 1750–1783 (English, ucdavis.edu [PDF]). Here p. 1769.