ECONOMICS Lecture Notes - Real Business-Cycle Theory, Finn E. Kydland, Edward C. Prescott
9 Dec 2021
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Document Summary
The dominant new classical theory of the business cycle during the period 1972 . 82 was the monetary surprise model initially developed by lucas (1975, 1977). Since the early 1980s the leading new classical explanation of aggregate instability has focused on real rather than monetary shocks. The transition from monetary to real theories of the business cycle was stimulated by two important developments. First, the supply shocks associated with the two opec oil price increases during the 1970s made macroeconomists more aware of the importance of supply-side factors in explaining macroeconomic instability. Second, the real shocks may be far more important than monetary shocks in explaining the path of aggregate output over time. The evidence is consistent with the proposition that output follows a path, which could best be described as a random walk". The real business cycle theory has been evolved out of the american new classical school of 1980s.
