ECON1102 Lecture Notes - Lecture 12: Austrian Business Cycle Theory, Malinvestment, Nominal Rigidity
Document Summary
What causes business cycles: real business cycle (neo-classical) theory. Variations in tfp; business cycles are fluctuations driven by real forces in the economy. Fluctuations essentially due to fluctuations in potential output: keynesian business cycle theory. Fluctuations the result of as and ad shocks. Business cycle possibly driven by animal spirits. Shocks often made worse die to rigidities in the economy (sticky prices / inflation, sticky wages, imperfect information: austrian business cycle theory. Flu(cid:272)tuatio(cid:374)s largel(cid:455) result of (cid:272)redit (cid:272)(cid:455)(cid:272)les; (cid:862)(cid:373)al-i(cid:374)(cid:448)est(cid:373)e(cid:374)t(cid:863) Inflation shocks: positive ad shock, monetary policy, previously, we studied short-run monetary response to effects of each shock, one variation at a time, as if monetary policy is ad-hoc, case by case policy behavior. In practice, policymakers are also interested in what happens when multiple events or shocks occur at the same time. Improve its trade position without increasing activity and igniting inflation. Help a country out of a recession.
