The ABCs of RBCs

McCandless, George

doi:10.4159/9780674033788

Cited by 11 publications

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“…Readers who are interested in the RBC approach can go to McCandless (2008), The ABCs of RCBs, which, as the title indicates, provides a simple and practical introduction to solving RBC models. The paper by Prescott (1986) is also worth reading, as it provides a veritable manifesto of the original approach.…”

Section: What Next?mentioning

confidence: 99%

Real business cycles

2021

Advanced Macroeconomics: An Easy Guide

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So far we have mostly talked about long-term dynamics, the process of capital accumulation, intergenerational issues, etc. However, a lot of macroeconomics focuses on the short term -the departures from the long-run trend that we've been mostly concerned about. This is, of course, particularly evident in recession times! Some of the biggest questions in macroeconomics revolve around this: how can we understand and influence the short-run, cyclical evolution of the economy? What can we (or should we) do about recessions?These are obviously important questions, and they are very much at the heart of the development of macroeconomics as a discipline, as we discussed in the first chapter of the book. In fact, business cycles is where the distinction between macroeconomic schools of thought became more evidentgiving credence to the idea that economists never agree with each other. Many of your policy recommendations will derive from which view of the world you have.Essentially, one school is ingrained in the Keynesian perspective where there is scope for intervening on the cycle and that doing so is welfare-improving. Its modern version is the New Keynesian approach originated in the 1980s in response to the empirical and methodological challenges from the 1970s. The second approach is quite skeptical about what policy can or should do, as it views the cycle as the result of optimal adjustments to real shocks. Its modern version was born, also in the 1980s, with the so-called Real Business Cycle (RBC) framework, which argued that a perfectly competitive economy, with no distortions or aggregate imbalances of the Keynesian type, but subject to productivity shocks, could largely replicate the business-cycle frequency data for real-world economies.Recent years have seen a great deal of methodological convergence, with both views adopting, to a large extent, the so-called dynamic stochastic general equilibrium (DSGE) framework that essentially implements the NGM with whatever exogenous shocks and market imperfections that you may feel are relevant. Because this model can be specified to work as a perfectly competitive distortion-free economy, or as one with more Keynesian-type characteristics, it has become the new workhorse of macroeconomics. This has allowed for a more unified conversation in recent decades.In light of that, and because we have covered much of the ground when we studied the NGM, we will start by describing the RBC framework, which started the trend that turned the NGM into the workhorse of modern macroeconomics. This framework, from a theory standpoint, is, conceptually, a simple extension of the NGM to a context with stochastic shocks.

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Section: What Next?mentioning

confidence: 99%