Real Business Cycle Models

The research program in real business cycle (RBC) theory began as an attempt to explain business cycle fluctuations as the result of shocks to the aggregate production technology. It belongs in the tradition of classical and neoclassical macroeconomics in the sense that the theory puts most of its emphasis on what an intermediate macroeconomics textbook would call shocks to aggregate supply, with no role for nominal variables. Nominal rigidities play no role, and markets are assumed to be perfectly competitive. The driving force behind aggregate fluctuations were stochastic shocks to the aggregate production technology. As this research program developed the term RBC became somewhat misleading as sev-eral authors began to look at sources of fluctuations through what an intermediate textbook would call an aggregate demand channel. These later models included explicit roles for gov-ernment spending, taxes (another type of supply shock), nominal rigidities in goods and factor markets, money, etc. My discussion of RBC models closely follows much of the discussion of King and Rebelo’