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Real business cycles: a selective survey

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Disciplines
  • Economics
  • Mathematics

Abstract

Economic Ileview Federal Reserve Bank of San Francisco Spring 1991 Number 2 Chan Huh and Bharat Trehan Reuven Glick Elizabeth S. Laderman and Randall 1. Pozdena Real Business Cycles: A Selective Survey Japanese Capital Flows in the 1980s Interstate Banking and Competition: Evidence from the Behavior of Stock Returns Real Business Cycles: A Selective Survey Chan Huh and Bharat Trehan Economist and Senior Economist, Federal Reserve Bank of San Francisco. The authors would like to thank the members of the editorial committee, Fred Furlong, Ramon Moreno, and Brian Motley, and also John Judd, Carl Walsh, and participants at an in-house FRBSF seminar for helpfUl comments. It is now more than ten years since the publication of Kydland and Prescott's first paper on real business cycles (RBC). RBC theories rationalize fluctuations in key real macro variables as the natural outcome ofthe competitive economy where individuals make optimal, intertemporal resource allocation decisions in response to stochastic shifts in the production technology. We use a simple model to bring out the salient features of this methodology and present a selective survey of work in this area over the last decade. Federal Reserve Bank of San Francisco It is now more than ten years since the publication of Kydland and Prescott's first paper on real business cycles. I Their early work has stimulated an impressive body of research. This paper presents a selective survey of the developments in this field over this period. There can be different ways of describing the distin- guishing tenets of real business cycle (RBC) theories. For instance, Stockman (1988, p. 24) says, "the purpose ofreal business cycle (RBC) models is to explain aggregate fluctuations in business cycles without reference to mone- tary policy." Perhaps more fundamentally, it is the follow- ing central implication of RBC theories that has attracted attention: Fluctuations in aggregate output, as well as employment, are not a manifestat

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