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This is a brief introduction to the special issue on “New Developments in Modelling and Estimation of Economic Cycles” . The concept and definition of economic and business cycles are discussed together with two main schools of thought, the Keynesian and the neoclassical. Until the Keynesian revolution in mainstream economics in the wake of the Great Depression, classical and neoclassical explanations were the mainstream explanation of economic cycles; following the Keynesian revolution, neoclassical macroeconomics was largely rejected. There has been some resurgence of neoclassical approaches in the form of real business cycle (RBC) theory. Real business cycle theory is a class of macroeconomic model in which business cycle fluctuations to a large extent can be accounted for by real (in contrast to nominal) shocks. In a broad sense , there have been two ways by which economic and business cycles have been studied, one analyzing complete cycles and the other, studying the behavior of the economic indicators during incomplete phases by comparing current contractions or expansions whith corresponding phases in the past in order to assess current economic conditions. Two different methodologies have been applied for current economic analysis, the parametric one, that makes use of filters based on models, such as ARIMA and State Space models , and the other based on nonparametric digital filtering. Some of the invited papers of this issue deal with this second approach.

Many mainstream business cycle theories were not able to cope with the financial crisis theoretically. With his concept of balance mechanics, the German economist Wolfgang Stutzel developed...

RESUMO A importância relativa de diferentes choques no nível de atividade econômica tem sido objeto de pesquisas nos últimos 25 anos. A visão tradicional, mantida por keynesianos e monetaristas, é que os choques na demanda agregada são os impulsos às flutuações econômicas, um fenômeno independente do crescimento. Uma sucessão de choques reais e transformações tecnológicas deu origem ao que é conhecido como Teoria do Ciclo Real de Negócios. Os proponentes de ciclos de negócios reais não consideram o crescimento separadamente das flutuações e procuram explicar as flutuações econômicas abstraídas de considerações monetárias. Este artigo revisa as evidências empíricas sobre a permanência de choques. Embora se possa dizer muito sobre a interdependência entre crescimento e flutuações, também conclui, contrariamente à visão da CRN, que a política econômica é importante na geração de um ambiente propício ao crescimento. ABSTRACT The relative importance of different shocks on the level of economic activity has been a hot subject of research over the last 25 years. The traditional view, retained by Keynesians and Monetarists alike, is that shocks to aggregate demand are the impulses to economic fluctuations, a phenomenon independent of growth. A succession of real shocks and technological transformations gave rise to what is known as Real Business Cycle Theory. Proponents of real business cycles do not consider growth separately from fluctuations and seek to explain economic fluctuations abstracting from monetary considerations. This paper reviews the empirical evidence on the permanence of shocks. Although much can be said for the interdependence between growth and fluctuations it also concludes, contrary to the RBC view, that economic policy is important in generating an environment conducive to growth.

This chapter, initially describes the role of innovation and human capital as perceived by the endogenous growth theory. It defines the externalities which lead to market imperfections posited by the New Keynesian thought. Furthermore, the Real Business Cycle Theory is presented, with a discussion of supply shocks and technological shocks according to Dynamic Stochastic General Equilibrium models (DSGE). The last parts of the chapter, present the operation of Central Banks during the period of the Great Moderation and Post-Keynesian Economics and the Financial Instability Hypothesis.

In this paper, a dynamic general equilibrium model with infinitely lived entrepreneurs and financiers is developed to investigate a possible mechanism that explains business cycles and financial crises. The highest growth rate is achievable only if financiers coexist with entrepreneurs, given a certain extent of financial market imperfections. However, if financiers coexist with entrepreneurs, the economy is highly likely to face a financial crisis at certain parameter values. These two-sided implications of the coexistence of entrepreneurs and financiers explain why both instability and high growth are frequently observed in modern economies. Furthermore, our model can obtain countercyclical movements in total factor productivity growth that cannot be explained by the standard real business cycle theory but were observed in the Great Recession of 2007–2008.

In this article, we first question the cogency of the strict delimitation of the object of study of economics in real business cycle theory and investigate its methodological and ontological consequences in the light of Roy Bhaskar's transcendental realism. We discuss the limits of real business cycle theory for detecting regularities, as well as the possibility of refuting conjectures. Finally, we show that our conclusions can be generalized to economic theories relying on the notion of general equilibrium.

We offer a qualitative evaluation of the transmission mechanisms of two real shocks, a productivity shock and a government expenditure shock in Walrasian business cycle models. The analysis is developed in a monetary small open economy business cycle model, a set-up general enough to study the effects of the two shocks on both real and nominal variables. Qualitative and graphical displays indicate properties of Real Business Cycles that are able to reproduce observed cyclical patterns, independently of the calibration used for different economies. These qualitative findings match the quantitative results found in the literature, and rationalize some disparity findings (such as the cyclicity pattern of prices) and failures (such as the Dunlop–Tarshis observation). We suggest that understanding the underlying qualitative intuitions of these models may be of great help in tackling new puzzles in this area.

Technology shocks and declining productivity have been advanced as important factors driving the Great Depression in the United States, based on real business cycle theory. We estimate an improved measure of technology for interwar manufacturing, using data from the U.S. census reports. There is clear evidence of increasing returns to scale and we find no statistical proof that technology shocks led to changes in hours worked or other inputs. This contradicts a key prediction of real business cycle theory. We find that increasing returns to scale are not due to market power but to labor and capital hoarding.

Joseph Schumpeter, a careful reader of Hayek, categorized Hayek’s theory of economic cycles as non-monetary. Almost every other source, including Hayek himself, categorized the theory as monetary. The issue turns on the concept of causality being used. The question of what causality concept to apply to complex phenomena has substantive implications for economic theory. A simple concept of causality, appropriate to the study of some physical phenomena, will mislead when applied to complex phenomena. We provide examples of errors in analysis that follow from the wrong choice of a causal paradigm.

Rescaled range and power spectral density analysis are applied to examine a diverse set of macromonetary data for fractal character and stochastic dependence. Fractal statistics are used to evaluate two competing models of the business cycle, Austrian business cycle theory and real business cycle theory. Strong evidence is found for antipersistent stochastic dependence in transactions money (M1) and components of the monetary aggregates most directly concerned with transactions, which suggests an activist monetary policy. Savings assets exhibit persistent long memory, as do those monetary aggregates which include savings assets, such as savings money (M2), M2 minus small time deposits, and money of zero maturity (MZM). Virtually all measures of economic activity display antipersistence, and this finding is invariant to whether the measures are adjusted for inflation, including real gross domestic product, real consumption expenditures, real fixed private investment, and labor productivity. This strongly disconfirms real business cycle theory.

Summary The vast majority of the sizable empirical literature which examines the relationship between productivity and employment examines data from developed countries. In this paper, we contribute to the limited empirical literature on the productivity–employment relationship in developing countries by applying structural vector autoregression (VAR) models on Korean data. We find that productivity-enhancing technology shocks reduce hours worked in the short run. Such evidence is qualitatively similar to findings from developed countries, and more consistent with sticky price models than the real business cycle theory. Although productivity-enhancing technology shocks are an important source of economic growth in Korea, they may have exerted a negative impact on employment.

The purpose of this paper is to re-examine the empirical relationship among alternative monetary aggregates (M1 and M2), output, prices, interest rates and exchange rates in India. The results of a five-variate vector error correction model are indicative of a bi-directional causality between each of the monetary aggregates and prices. Our findings of a feedback relationship make each of the monetary aggregates a poor intermediate target and informational variable. Moreover, contrary to most recent research in this area, the results are supportive of the real business-cycle view and the Keynesian monetary accommodation hypothesis rather than the monetarists’ theory of the business cycle.

The analysis begins with a synthetic discussion of the current state of the business cycle theory. Three groups of current theories have been briefly discussed: the real business cycle theory, the Neoschumpeter theory and those formulated within the framework of the new Keynesian economy. A common belief that deviations of production and employment from so-called natural levels are caused by various kinds of shocks of a random nature, coexists with these theories. This belief is characteristic of representatives of the new classical economy and of monetarists.It was assumed in this article that proving the rhythmicallity of oscillations which occur in reality is a sine qua non condition for including them in the regularity of development. This rhythmicallity should express itself in a comparatively small differentiation of duration, i.e. the cycle period. After accepting a quite elaborate definition of a cycle, most justified from the theoretical point of view, its periods in American, German and Polish economies were analysed. A period was counted from the beginning of the phase of revival in one business cycle to the beginning of the phase of revival in the next one. A very close resemblance between the cycle course in Poland and the compared economies was found.

This paper examines the existence of limit cycles in Japanese macroeconomic variables using a threshold autoregressive (TAR) model. Recent business cycle theories are grouped into two main categories: (1) real business cycle and (2) endogenous business cycle. Real business cycle theory, which is modelled by an autoregressive (AR) model, has a linear dynamic system with consecutive exogenous shocks that cause cyclical deviations from a growth trend. On the other hand, endogenous business cycle theory, which includes limit cycles characterized by a TAR model, is based on a nonlinear dynamic system that has a mechanism that induces complicated economic fluctuations endogenously. Which theory is appropriate has significant implications for policy makers. Accordingly, it is necessary to investigate whether economic fluctuations depend on an endogenous mechanism or on exogenous shocks. To investigate this, we test for linearity in Japanese macroeconomic variables. The linearity test in the paper distinguishes the TAR model from the AR model. We find that most fluctuations have TAR processes. The results indicate that most Japanese macroeconomic data have limit cycles, and imply that the government could control the business cycle in Japan, even though the cyclical behaviour is extremely complicated.

Two attempts to explain the phenomenon of business cycles – the former by Schumpeter and the latter by Kydland and Prescott, take polemic positions on role of human agency in bringing about technological change. Schumpeter considers technological change as the consequence of decisions of entrepreneurs who search for “new ways of doing things”. The Real Business Cycle (RBC) theory proposed by Kydland and Prescott posits that technological changes occur as random shocks to economic system. Technology shocks imply that entrepreneurs/managers have hardly any role to play in technological change, and suggest a deterministic and limited role for managers. This provides a research setting to test these competing hypotheses as the null and alternative. We test the technology shock hypothesis with time-series data on productivity from Indian and US sugar industries. Results from our study reject the technology shock hypothesis and implies pre-eminence of managerial discretion and strategic choice.

The problems faced by the American economy in the second half of 2007, which intensified in 2008, have once again asked economic science, and even more so economic policy, questions relating to business cycles - the reasons for cyclical fluctuations, the character of business cycles and, naturally, economic policy measures that can be implemented to alleviate and overcome an economic recession. Since the 1970s, business cycle theories have been intensively developed - ranging from monetary theories, developed within monetarism and the first phase of New Classical Macroeconomics, to the real business cycle theory of New Classical Macroeconomics. Consequently, the triggers for the beginning of a cycle can be monetary (monetary theories) or real in the form of technological shocks (real business cycles). In essence economic policy conducted since the 1970s, has rejected the Keynesian explanations of the functioning of the economic system, and thus the policy of aggregate demand management. However, the measures that are now being implemented in the USA point to a return to Keynesianism. This refers, above all, to attempts to compensate for the inefficiency of monetary policy with fiscal expansion. All three psychological propensities (propensity to consume, propensity to invest and liquidity preference) in Keynes's theory and applied in Keynesian economic policy, are still the significant determinants of monetary and fiscal policies. The return to Keynesianism points to the depth of the crisis faced by the USA, but also confirms the vitality of Keynesian economics and affirms the view that - although Keynes wished to present his theory as being "general" - it is actually the theory of economic depression.

There is considerable dissatisfaction in the profession regarding the teaching of macroeconomics after the financial crisis. The ?Great Recession? highlighted the inadequacy of traditional macroeconomic modelling, based on real business cycle theory and rational expectations, to appropriately explain why the contraction world-wide was so widespread and why it has been so persistent. Textbooks have been slow to respond to these concerns, possibly because it was believed that this recession would be temporary. In addition, new policy measures such as quantitative easing and the possibility of the zero lower bound in interest rates required a re-orientation of macroeconomics pedagogy. The purpose of this paper is three-fold. First, we sketch and highlight how some of these policy issues could be explained within a traditional Keynesian macromodel. However, such formal presentation to students quickly becomes arid, so to sustain interest we need to supplement the core analytical material with innovative pedagogic strategies which needs interactive student participation. The second purpose of the paper is to give examples of such teaching methods that we have used: the use of video material; utilization of websites from news media; film screening and in-class discussion (Inside the Meltdown); flipping the classroom; playing monetary policy games; as well as, organizing a debate between the proponents of Keynesian ideas and neoclassical models in solving the long recession. Our approach is a synthesis of traditional teaching of economic models with blended learning methods. The third purpose of the paper is to evaluate an early presentation of this method and content to students and how they responded to such an approach. Our pedagogic approach is not vastly different from what policy institutions such as Central Banks are thinking. Consider the following quote from a highly rated British macroeconomist, Professor Wilhem Buiter, on the applications of monetary policy by the Bank of England: ?The Bank of England in 2007 faced the onset of the credit crunch with too much Robert Lucas, Michael Woodford and Robert Merton in its intellectual cupboard. A drastic but chaotic re-education took place and is continuing. I believe that the Bank has by now shed the conventional wisdom of the typical macroeconomics training of the past few decades. In its place is an intellectual potpourri of factoids, partial theories, empirical regularities without firm theoretical foundations, hunches, intuitions and half-developed insights. It is not much, but knowing that you know nothing is the beginning of wisdom?.

This paper analyses the importance of technology and non-technology shocks in business cycles of European Union post- transition countries. A technology shock is defined in a structural vector autoregression model as the only shock with the positive long run impact on labour productivity. Different assumptions of New Keynesian and Real Business Cycle theory are tested. Positive technology shock decreases employment in the short run, which is an indicator of nominal rigidities. Results demonstrate that the non-technology shock is more important in explaining business cycles in post-transition countries, although technology shock is not trivial. The technology shock cannot replicate basic business cycle facts observed in the data: it produces low or negative correlation between employment and GDP, and strong negative correlation between labour productivity and employment. Technology and non-technology GDP components are analysed in transition and post-transition period, which is of special interest for post-transition countries. Results show the non-technology shock was the dominant source of business cycles both during and after the transition period. Global recession in 2008 was also result of a decrease in non-technology GDP component. Real Business Cycle theory is not in compliance with obtained results.

Recently macroeconomists have moved to a new neo-classical synthesis by integrating Keynesian features like imperfect competition and nominal rigidities with dynamic stochastic general equilibrium model of the Real Business Cycle Theory with micro foundations and rational expectations, [see, for instance, McCallum and Nelson (1999)]. The standard model comprises of a trinity; consumption and inflation adjustment equations with a monetary authority's reaction function. One of the pillar of the modelinflation adjustment equation, also known as New Keynesian Phillips Curve (NKPC) in the literature, has at least two important features; unlike the traditional Phillips curve the NKPC is forward-looking; and it has been derived from the profit maximising behaviour of the firms in a monopolistically competitive market structure. In this type of framework, instead of starting with the ad hoc curves, we investigate the price setting behaviour of firms while formulating the firms' profit maximisation problem. It has an added advantage of analysing the deep structural parameters of the model, e.g. the degree of price inertia, parameter of firms' time preference, etc, which are the important ingredients of policy making. On the other hand in this type of inflation adjustment equation, inflation is determined by expected future inflation, which has certain implications for policy making. For instance, contrary to the case of traditional or backward-looking Phillips curve, policy maker can deflate the economy almost immediately at no cost. An important issue remains however that whether or not the economic agents are forward-looking. For instance, Furher and Moore (1995) highlights that the economy consists of a combination of forward-looking as well as well as backward-looking agents, thus showing the importance of previous periods' inflation in determining the current inflation. For this reason most of the studies in the area include hybrid New Keynesian Phillips curve [see for instance, Gali and Gertler (1999)]. The empirical evidence on the subject is mixed. An important issue regarding the NKPC is how to estimate it. The NKPC is estimated either through Generalised Method of Moments (GMM), Maximum Likelihood (ML) technique or the Vector Auto

We advocate in this paper the use of a sequential partial indirect inference (SPII) approach, in order to account for calibration practice where dynamic stochastic general equilibrium models (DGSE) are studied only through their ability to reproduce some well-chosen moments. We stress that, despite a lack of statistical formalization, the controversial calibration methodology addresses a genuine issue on the consequences of misspecification in highly nonlinear and dynamic structural macro-models. We argue that a well-driven SPII strategy might be seen as a rigorous calibrationnist approach, that captures both the advantages of this approach (accounting for structural “a-statistical” ideas) and of the inferential approach (precise appraisal of loss functions and conditions of validity). This methodology should be useful for the empirical assessment of structural models such as those stemming from the real business cycle theory or the asset pricing literature.

1. in their critique of Keynesian economics, Lucas and Sargent [1978] highlighted the failure of Keynesian models to explain the stagfl ation of the 1970s but failed even to mention the OPEC oil shock in their discussion; in contrast, once Keynesian economists had adapted the AD-AS framework to take into account the OPEC oil shock induced shifts of the AS curve, not only could Keynesian economics explain US economic history between 1960-73, it could also provide a plausible explanation of the ‘stagfl ation’ experience of the post 1973 period (see Blinder [2002]); 2. ‘the only place that the new classical counter-revolution succeeded was in academia’, it had little impact during either the Volker or Greenspan eras, during which time practical macroeconomic policymaking remained ‘thoroughly Keynesian, continuously practicing countercyclical monetary policy to combat both infl ation and recession;’ furthermore, new classical economics did not have any infl uence in the wider business community; 3. the predictions of the new classical monetary models were refuted by the experience of the 1982 recession in the US, and both real business cycle theory, and the Ricardian equivalence hypothesis do not stand up to empirical scrutiny; 4. ‘undergraduate textbooks that dominate the market continue to use a Keynesian framework;’ 5. the attraction of new classical economics within academia has been driven mainly by the ‘new set of mathematical models that it provided for new PhD candidates and assistant professors.’

Is the Great Depression amenable to real business cycle theory? In the 1970s and 1980s Lucas and Prescott took an abstentionist stance. They admitted that, because of its exceptional character, an explanation of the Great Depression was beyond the grasp of the equilibrium approach to the business cycle. However, while Lucas stuck to this view, we show that Prescott changed his mind at the end of the 1990s, breaking his earlier self-imposed restraint. In this paper we document this evolution of opinion and produce a first assessment of real business cycle models of the Great Depression. We claim that the fact of having constructed an equilibrium model of the Great Depression constitutes a methodological breakthrough. However, as far as substance is concerned, we argue that the contribution of real business cycle literature on the Great Depression is slim, and does not gain the upper hand over the works of economic historians. We conclude suggesting that historical episodes may exist for which the modelisation method of real business cycle theory is inferior to the "thick" sort of analysis that is proper to economic historians.

This paper aims to detect temporal and continuous structural changes in the major Japanese macroeconomic time series by means of Yamamoto’s (1996) augmented step-wise Chow test, and to clarify the stationarity and/or non-stationarity of these series by conducting unit root tests. It also aims to verify empirically that a model assuming no structural change is not likely to reject a null hypothesis even when a true model contains a structural change. Structural changes are assumed to contain not only changes in the parameters of the drift term and the time trend, but also changes in other parameters. The results favor the existence of real business cycles.

I. WHAT IS CHANGING? It appears that any overt expression of interest in methodology is considered a clear sign of weak-mindedness or premature senility. --L. Boland, "Methodology" entry in the New Palgrave Dictionary of Economics As time passes, one should expect the techniques, and consequently the underlying methodology also, to evolve. This article will discuss some of the major changes in methodology since the middle of the last century to now. Among the major driving forces for this change is the growth in the amount of data available in most parts of economics together with the tremendous growth in the speed and storage ability of computers, as well as the interactive aspects of the Internet. Techniques or methodologies that were unthinkable or certainly unavailable 25 years ago are now standard and common. A new mind-set is required. To limit dissension I will consider economics to be a decision science, describing the decisions made by economic agents such as consumers, employers, investors, and policy makers. It follows that the purpose of any economic analysis will be to help actual decision makers make better decisions, on average, in a stochastic environment. Such an analysis can be thought of as a "final good"; some analysis will be an "intermediate good," which helps another economist produce a better final good. By taking these attitudes, a pragmatic viewpoint can be taken in many situations and provide solutions to some questions, as will be seen. The many books and articles on economic methodology and philosophy in the past century consider many topics that were considered of considerable interest then but have since lost their importance. For example, a topic earlier viewed as being of some importance was "is economics a science?," although I believe that it is no longer a hot topic around economics departments. The answer to the question is that no one really cares! However, that may not be the correct response because if economics was classified as a science, the discipline may be eligible for much larger research grants. Another major topic with a lasting impact was about whether a model needs an input of economic theory or not; or equally, can a satisfactory model be achieved just by introspection without any use of data? I can recommend a very interesting short article on this topic titled "Methodenstreit" (or battle of the models) by Daniel Fusfield in the New Palgrave (1987). The battle was between Carl Menger and Gustav Schmoller, starting in the 1880s, with Menger in favor of pure theory and Schmoller wanting to use just an empirical approach. Unfortunately their initial debate became confused in a more political one with Menger pushing laissez-faire policies, whereas Schmoller supported interventionist government policy approaches--essentially "right" versus "left" in today's terminology. Fusfield states that on the basic issue of the place of theory and empirical studies in economics, Menger and Schmoller agreed that both were necessary. They disagreed on the emphasis to be placed on each and their role in the development of conclusions. Menger correctly pointed out that a model based just on data is limited in generality, because the data cover only some of the possible space; it needs (correct) theory to go beyond the sample space. He also said that data acted as a bridge between the principles of pure economics and the policy problems of applied economics; in fact, he warned against policy analysis without an empirical study. Schmoller was less generous to theorists, finding the work too abstract, irrelevant, and based on assumptions that are unrealistic. A later, similar discussion took place between Koopmans (1947) and Burns and Mitchell (1947) that influenced modeling into the 1960s and 1970s. Where do we stand 115 years later in this discussion? In many ways it seems quite modern, certainly compared to some of the remarks made around real business cycle theory a few years back. …

We extend the basic RBC model to allow for biased technical changes. One broad definition of biased technical changes is changes that directly affect factor elasticities. Given the link between changes in factor elasticities and factor shares, observed fluctuations in US labor's share are motivation for this study. We find that when the technology shock process is calibrated according to US labor's share dynamics, 93 percent of US GDP volatility is accounted for. The observed countercyclical nature of labor's share is accounted for, although the model correlation is too high. As well, the model exhibits business cycles that are qualitatively similar to those of the standard model with neutral technology shocks. These findings, while robust to the short-run properties of various measures of labor's share, are sensitive to the average labor's share used in calibration, e.g. departing from a baseline calibration value of 63 percent, for steady-state labor's shares of 50 percent and 70 percent the model accounts for 107 percent and 84 percent of US GDP volatility respectively. (Copyright: Elsevier)

I argue that the standard approach represented by real business cycle theory is misguided, and that a fundamentally different approach is necessary. The new approach, based on the method of statistical mechanics, leads us to a new concept of “equilibrium”. In equilibrium we must have a distribution of productivities rather than a unique level of productivity. We then find that demand plays a crucial role in the determination of the aggregate output, as the old Keynesian economics claims. I show that the demand constraint is important not only in short-run but also in long-run economic growth.

One can unequivocally concede that we exist in a world of ‘unequal’ microeconomic units, with the disparities in the technological prowess among various nations serving as a prime example of this hegemony. Given the dense network of trade & knowledge flow the different countries find themselves embedded in, the interdependencies among the countries are in fact primarily non-linear with spill-over effects of different macroeconomic variables contributing to the heterogeneity. One such critical variable would be technological evolution wherein a set of countries would be more evolved than the others, wherein the countries belonging to the latter category (imitators/predators) would attempt to pilfer the know-how of the former category (innovators/prey). Taking a leaf out of evolutionary biology, it is indeed possible to model the interactions among a large set of countries, comprising of both predators and preys, so as to map the impact of the trickle-down effects of technology with regard to its effects on partner economies. Thus, by leveraging upon the Lotka-Volterra model, this report intends to not only trace the lagged diffusion of technology on a global scale, but also quantify the cross-correlation structure for a system of countries. The results pertaining to the stated simulations for the annual per capita GDP data of the G-7 countries are presented in this report, coupled with a demystification of the implications entailed therein.

The paper explores the theory of the aggregate price, profit, and business fluctuations in Keyne's Treatise for its implications for modern macro-economic analysis. As in the Treatise, profits are first defined within a theory of the agregate price level, as aggregate investment minus saving. Deriving aggregate total revenue and aggregate total cost from this price theory, the paper shows how to construct a version of the Keynesian cross diagram. The cross construction suggests an important qualification for fiscal policy, that total cost does not shift. Then, using a neoclassical definition of profit and the total-cost / total-revenue approach, the paper derives aggregate supply, and then adds aggregate demand in an integrated framework. Comparative statics of the AS-AD analysis and the central role of profit in the Treatise suggest that a focus on profit might be useful in identifying exogenous technology shocks of real business cycle theory.

Most economic models do not suggest an optimal fiscal policy in which the government's budget is balanced each period. Conventional wisdom suggests that the government run surpluses and deficits to smooth taxes. In this paper, I use an approach which brings together real business cycle theory and the theory of public finance to evaluate the effects of a balanced-budget restriction. Four fiscal policies are investigated in a model with growth. All models are solved numerically using a multidimensional collocation parameterized expectations algorithm. The welfare consequences of each policy are measured, and the optimal Ramsey policies are characterized. Journal of Economic Literature Classification Number: E62.

A structural vector autoregression is used to uncover the cause of the persistent US bilateral trade deficit with Japan. Identification of the estimated system is obtained by using long-run restrictions generated from a two-country real business cycle model. The primary cause of the trade imbalance is the continual depreciation of the US real exchange rate. The importance of exchange rate innovations is at odds with standard real business cycle theory where such relative price movements are endogenous. However, many other aspects of real business cycle theory are supported by the empirical results.

In the conventional Keynesian model, nominal wage contracts (acting as a friction) transmit monetary shocks to real variables. In contrast, the new classical or real business cycle theory claims that firms and workers ignore the behavior of the actual real wage and instead generate an efficient level of employment (hence, output) based on a shadow real wage. Using Brazilian data covering a period during which the economy suffered hyperinflation and wage contracts were indexed by the government, results show that these fixed nominal wage contracts did not generate a nonneutrality of money as proposed by the Keynesian model. Instead, results support the view that contracts cannot propagate nominal shocks.

It is often claimed that the framework for a market economy is largely in place in the Central European transition countries. However, such statements are usually based only on a general assessment of transition reforms. In this paper, a neoclassical growth model, widely applied in real business cycle theory, is modified to facilitate a rigorous analysis of Central European economic performance. The empirical results suggest that macroeconomic fluctuations in transition economies are consistent with properties of the unconditional second moments both predicted by the theoretical model and estimated for a control group of Western European economies. J. Comp. Econom., June 1999, 27(2), pp. 259–280. Office of the Chief Economist, European Bank for Reconstruction and Development, One Exchange Square, London EC2A 2EH, United Kingdom.

According to real business cycle theory the money multiplier explains money-output correlations because nominal policy is impotent. This paper re-examines the key assumptions of the multiplier approach and presents empirical evidence for five countries. The main conclusions are as follows. First, base money does Granger-cause economic activity. Second, actual operating procedures of monetary authorities prevent orthogonalization of base money and multiplier changes. The distinction between real and nominal aspects of monetary policy is therefore not very helpful.

Summary Following standard real business cycle theory, long run economic growth and short run business cycle fluctuations are attributed to a series of productivity shocks propagated by the economic system which is assumed to be in a rational expectations equilibrium. Characterizing the technical progress as the common stochastic trend we are able to investigate the short and long run effects of the productivity shocks using a cointegrated system. From the empirical analysis it emerges that the long run relationship between the system variables can be traced back to a single permanent component which is interpreted as a measure of technological progress. The short run dynamic impact of the permanent innovations is investigated using the empirical impulse response functions. It turns out that the permanent shocks are able to explain a substantial portion of business cycle fluctuations.

During the downturn of 2008-2009, output and hours fell significantly, but labor productivity rose. These facts have led many to conclude that there is a significant deviation between observations and current macrotheories that assume business cycles are driven, at least in part, by fluctuations in total factor productivities of firms. We show that once investment in intangible capital is included in the analysis, there is no inconsistency. Measured labor productivity rises if the fall in output is underestimated; this occurs when there are large unmeasured intangible investments. Microevidence suggests that these investments are large and cyclically important.

In this paper the relationship between the growth of real GDP components is explored in the frequency domain using both static and dynamic wavelet analysis. This analysis is carried out separately for both the US and the UK using quarterly data, and the results are found to be substantially different in the two countries. One of the key findings in this research is that the “great moderation” shows up only at certain frequencies, and not in all components of real GDP. We use these results to explain why the incidence of the great moderation has been so patchy across GDP components, countries and time periods. This also explains why it has been so hard to detect periods of moderation (or otherwise) reliably in the aggregate data. We argue it cannot be done without breaking the GDP components down into their frequency components across time and these results show why: the predictions of traditional real business cycle theory often appear not to be upheld in the data.

Real business cycle (RBC) theories are nonmonetary explanations of the business cycle. Supporters of RBC theory claim that business cycles arise due to changes in real factors, instead of monetary factors, in the economy. The focus is on alleged causes of the business cycle that emanate from places other than changes in the supply of money and spending. Further, such cycle theory assumes markets are always in equilibrium (i.e., they always clear, even during recessions and depressions).1

Real business cycle theory asserts that technological shocks are a major root cause of cyclical fluctuation, but has yet to explain how a sector technological change impacts upon other sectors of the economy to produce aggregate fluctuations in output. This paper suggest that an appropriate analytical framework with which to address the issue may be derived from the long forgotten concept of the elasticity of demand for income in terms of work effort. Our contention is that the concept could be usefully employed by contemporary real business cycle theorists to explain the macroeconomic repercussions of sectoral changes.

Building on previous nonlinear time-series models we further examine the form of nonlinearity in US output. We develop a model of US output that allows for floor and ceiling effects to alter the dynamics of output growth. The model estimated on post-Korean War quarterly data, displays features similar to nonlinear trade cycle models of the 1940s and 1950s. Thus, as predicted by many of the earlier theoretical models, our empirical results suggest that the turning points of the business cycle provide new initial conditions for the ensuing growth process. We also find important asymmetries in the responses of output to positive and negative shocks. This history and shock dependence property is not present in linear or approximately linear models of the type that arise in the standard implementations of Real Business Cycle theory.

Using recent literature, examines developments in seven macroeconomic schools of thought: orthodox Keynesian, monetarist, new classical, real business cycle theory, new Keynesian, Austrian and post‐Keynesian. Describes all of these and classifies them as orthodox, new or radical. After setting out the differences, discusses the degree of agreement between the schools of thought. Concludes that macroeconomics is constantly evolving, resulting in new disagreements requiring a new consensus.

A rich theoretical and empirical tradition exists in the economics liter- ature that argues that business cycle volatility is strongly and positively correlated with real per-capita economic growth. Joseph Schumpeter (1961) argues that economic development critically depends on the introduction and adoption of new technology which occurs in waves, and is therefore a main cause of business cycle volatility. Simon Kuznets (1967), addressing both the empirical and theoretical literature of his time (including Schumpeter's), concludes that business cycle volatility and economic growth are both statistically and causally related, with those variables that cause increased cyclical volatility increasing the rate of economic growth. The Schumpeter-Kuznets tradition maintains that a fall in business cycle volatility should result in a fall in the rate of economic growth. And, given the rate of population growth, this would invariably reduce the rate of per-capita economic growth. An important component of real business cycle theory, which incor- porates some of the most recent literature on business cycles, follows the Schumpeter-Kuznets tradition in arguing that real shocks to the economy, largely embodied in technical change, play the detennining role both in affecting business cycle volatility and in determining the rate of economic growth. Technological shocks take the form of a random walk with drift, thereby affecting the pace of economic growth.

Temporal Causality and the Dynamic Interactions among Macroeconomic Activity within a Multivariate Cointegrated System: Evidence from Singapore and Korea. — The main purpose of this paper is to discern the dynamic causal relationship (in the Granger (temporal) sense) among real output, money, interest rate, inflation and exchange rate in the context of two small open economies, such as Singapore and Korea. The Granger-causal chain implied by the authors’ evidence that real output more often the authors’ predominantly leads (rather than lags) money supply followed by other three endogenous variables, is consistent more with the recent Real Business Cycle theory than with the other two major macroeconomic paradigms such as the Keynesian and the Monetarist.

Real Business Cycle Models and Money: A Survey of Theories and Stylized Facts. — This article presents a survey of real business cycle theory, with special attention to the role of money. This role is mainly associated with cash-in-advance constraints, liquidity effects and aspects of financial intermediation. Apart from reviewing the literature, stylized facts about the comovements of output and prices versus monetary aggregates and interest rates over the cycle are assembled and discussed for eight industrial countries, including the G5-countries, Denmark, Belgium and the Netherlands. The paper concludes that further developments in monetary real business cycle theory could benefit from taking into account a broader set of stylized facts about prices than has been done thus far, as well as from introducing non-Walrasian elements and endogenizing monetary policy.

A real business cycle model with heterogeneous agents is parameterized, calibrated, and simulated to see if it can account for some stylized facts characterizing postwar U.S. business cycle fluctuations, such as the countercyclical movement of labor’s share of income, and the acyclical behavior of real wages. There are two types of agents in the model, workers and entrepreneurs, who participate on an economy-wide market for contingent claims. On this market workers purchase insurance from entrepreneurs, through optimal labor contracts, against losses in income due to business cycle fluctuations. The model is used to study the allocation of risk and the distribution of income over the business cycle.

This paper examines international linkages amongst G7 economies, in terms of co-movements in output growth and fluctuations, in the frequency domain. The paper has identified patterns in international business cycle co-movements among the G7, offering a general outlook of international business cycle co-movements. Moreover, the paper details the lower frequency, higher frequency and middle range characteristics of international co-movements in output growth and fluctuations. The main findings of the study are that co-movements among G7 economies are considerably stronger at lower frequencies, and G7 economies have become more synchronized considerably in episode 2 since the new millennium. The results and findings show support for real business cycle theory being extended to an international arena, with long effect real shocks impacting economies across borders. The three euro economies become more integrated since the new millennium, against a background that all G7 economies have also become more synchronized.

The puzzle of procyclical labor productivity occupies an important position in the debate over real business cycle theory. Real business cycle proponents attribute it to procyclical technology shocks, opponents to 'labor hoarding'--retention during recessions of workers not needed for current production, thus downwardly biasing productivity measurements. This paper uses a model featuring heterogeneous industries to illustrate that the conventional presumption of countercyclical aggregate labor hoarding generating procyclical productivity measurements is not necessarily well grounded in theory. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Standard real business cycle theory predicts that consumption should be smoother than output, as observed in developed countries. In emerging economies, however, consumption is more volatile than income. In this paper the authors provide a novel explanation of this phenomenon, the ‘consumption volatility puzzle,’ based on political frictions. They develop a dynamic stochastic political economy model where parties that disagree on the size of government (right-wing and left-wing) alternate in power and face aggregate uncertainty. While productivity shocks affect only consumption through responses to output, political shocks (switches in political ideology) change the composition between private and public consumption for a given output size via changes in the level of taxes. Since emerging economies are characterized by less stable governments and more polarized societies, the effects of political shocks are more pronounced. For a reasonable set of parameters the authors confirm the empirical relationship between political polarization and the ratio of consumption volatility to output volatility across countries.

Myself when young did have ambition to contribute to the growth of social science. At the end, I am more interested in having less nonsense posing as knowledge (Frank Knight, 1956).At the time I was finishing graduate school, there was no real "field" of economic methodology. There were of course methodological writings by influential economists (e.g., Robbins 1932, 1952; Friedman 1953; Samuelson 1964, 1965), but these works were seldom of the same intellectual quality as the research that had made these economists famous as economists. There were also brief discussions of economics in influential books on the philosophy of science (e.g., Hempel 1965, Nagel 1961), but they focused on general problems associated with the human and social sciences, rather than with specific issues concerning economics. There were two recently published case studies in the philosophy of economics written by philosophers-Hausman (1981) and Rosenberg (1976)-but in general the field was almost as unpopular among philosophers as it was among economists. Finally, and perhaps most importantly, there was beginning to be a collection of dedicated books on economic methodology-Blaug 1980a; Boland 1982; Caldwell 1982; Hutchison 1981; Latsis 1976; Wong 1978; and a few others-but it was a relatively assorted collection of texts with little to suggest that these books would end up being the foundational texts for the inchoate field of economic methodology. All in all, at that time there seemed to be very little to encourage a young scholar thinking about an academic career in economic methodology or the philosophy of economics.However that was a long time ago, and I am happy to be able to report that the situation today is much improved. There are now dedicated journals such as The Journal of Economic Methodology and Economics and Philosophy, as well as numerous journals specializing in the history of economic thought that frequently publish methodological research. There are also a number of research institutes and professional societies dedicated to the intersection of economics and philosophy around the world. It is now possible for a young scholar to specialize in research connecting economics and philosophy without necessarily feeling like they are jeopardizing the possibility of a successful academic career. Of course, this does not mean that such careers are easy, or that all is well within the field-i.e., "better" certainly does not imply "good". Particularly in the United States, the economics profession still seems to have little or no interest in elevating economic methodology to the status of a legitimate field of inquiry within the discipline of economics. The financial crisis and the associated questioning of the methodological foundations of macroeconomic theory, seems to have initiated a momentary warming of the relationship between mainstream economics and economic methodology, but who knows how serious the overtures are or how long they will last. Also, it is probably not a good sign that the profession considers economic methodology to be an inferior good in the traditional microeconomic sense: that is, one that economists consume more of when incomes fall.The last twenty or so years have also witnessed a significant change in the traditional relationship between "orthodox" and "heterodox" schools of thought within economics. For most of the second half of the 20th century the economic mainstream, the orthodoxy, consisted of neoclassical microeconomics combined with some version of macroeconomics (it was IS-LM Keynesian theory during the immediate post WW-II period, and new classical macroeconomics and real business cycle theory later). On the other hand, the periphery of the discipline was divided into a small number of self-consciously heterodox schools of thought: institutionalist, Marxist, Austrian, post-Keynesian, and others. There were two key features to this half-century long equilibrium in economic theorizing. …