what are the main propositions of the real business cycle model
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Real-business-cycle theory assumes that the market is undergoing variations in its ability to turn inputs into products and that these technical fluctuations trigger changes in outputs and employment. Hence, the business cycle is due to errors in monetary policy.
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Recessions are the result of excessively tight monetary policy, just as booms are the result of monetary policy being too easy. The business cycle is thus due to monetary policy errors.
This proposition underlies a lot of popular economic discussion and financial and economic journalism. Politicians and political journalists also seem to adhere to it, although in a slightly weaker form; they certainly view recessions as being the result of an error in economic policy, and assume that voters will punish the perpetrators of the error.
Proposition Two
Monetary policy only affects nominal variables, whereas the business cycle is caused by real factors, particularly on the supply side. The neutrality of money implies that monetary policy can only determine the rate of inflation, but not the rate of real economic growth, unemployment etc.
This view is totally absent from the popular discussion, but is the dominant one in the current academic literature. I am reliably informed by one of my academic colleagues that a pre-condition for having a journal article accepted by the Journal of Monetary Economics (currently the most prestigious journal in monetary economics) is an acceptance that monetary policy has no real effects.
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Recessions are the result of excessively tight monetary policy, just as booms are the result of monetary policy being too easy. The business cycle is thus due to monetary policy errors.
This proposition underlies a lot of popular economic discussion and financial and economic journalism. Politicians and political journalists also seem to adhere to it, although in a slightly weaker
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The main proposition of the real business cycle model:
Real-business-cycle theory assumes that the market is undergoing variations in its ability to turn inputs into products and that these technical fluctuations trigger changes in outputs and employment. This theory also describes recessions as cycles of decline in technology.
Recessions are the result of excessively strained monetary policy, just as booms are the result of too-easy monetary policy. Hence, the business cycle is due to errors in monetary policy.
Politicians and political journalists also appear to adhere to it, albeit in a somewhat weaker form; they certainly see recessions as the result of an economic policy error and assume that voters will punish the perpetrators of the error.
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