ECON 2500 Lecture Notes - Lecture 6: Time Series, Nominal Rigidity, Real Business-Cycle Theory

• School: York University
• Department: Economics
• Course: ECON 2500
• Professor: Andrei Semenov

Document Summary

Econ 2500 tutorial 6 notes business cycle models with flexible prices and wages. Introduction: keynesians believed that monetary policy was unimportant relative to fiscal pol- icy and that government policy should take an active role in guiding the economy along a smooth growth path. Lucas, thomas sargent, neil wallace, and robert barro: two key principles coming out of the rational expectations revolution were: Macroeconomic models should be based on microeconomic principles; in other words, they should be grounded in descriptions of the preferences, endowments, technology, and optimizing behavior of consumers and firms. Models with flexible wages and prices can be productive vehicles for studying macroeconomic phenomena: there was some resistance to following these two principles, but there was wide acceptance, at least of the first principle, by the 1980s. It became clear as well, with respect to the second principle, that the flexibility of wages and prices does not automatically rule out an active role for government policy, and that.