What Is Real Business Cycle Theory?
What Is Real Business Cycle Theory?
Real business cycle theory (RBC theory) are a class of macroeconomic models in which business cycle fluctuations to a large extent can be accounted for by real (in contrast to nominal) shocks. Unlike other leading theories of the business cycle, RBC theory sees recessions and periods of economic growth as the efficient response to exogenous changes in the real economic environment. That is, the level of national output necessarily maximizes expected utility, and government should therefore concentrate on the long-run structural policy changes and not intervene through discretionary fiscal or monetary policy designed to actively smooth out economic short-term fluctuations.
According to RBC theory, business cycles are therefore "real" in that they do not represent a failure of markets to clear but rather reflect the most efficient possible operation of the economy, given the structure of the economy. RBC theory differs in this way from other theories of the business cycle such as Keynesian economics and Monetarism that see recessions as the failure of some market to clear.
RBC theory is associated with freshwater economics (the Chicago school of economics in the neoclassical tradition). For more detailed information on this fascinating subject, please click the following link: Wikipedia
Further Reading:
If you are interested to know more about this and similar theories and working practices in trade and commerce to generate ideas and plans for boosting your own business and its results, here are some websitres of interest that you may find useful:
- The Austrian Theory of the Business Cycle: An interesting paper specifically on business cycle theory from an Austrian point of view by author Roger W. Garrison
- The Quantitative Macroeconomics and Real Business Cycle Home Page: This is a collection of links to several resources about quantitative macroeconomics and especially real business cycle (RBC) theory
- Keynesian Business Cycle Theory: Homepage to a collection of papers on business cycle theory by John Maynard Keynes
- Methods and Problems in Business Cycle Theory: PDF paper providing another example of pre-Keynesian business cycle theory
- International Trade Administration: This website provides information on the defense, expansion and promotion of market access for U.S. goods, services, and investment abroad to help American businesses thrive and create jobs at home
- International Chamber of Commerce: This website provides policy statements, guidelines, codes, and rules for business practices in advertising/marketing, business law, e-commerce, the environment, intellectual property, etc pertaining to international trade and commerce