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Real business-cycle theory (RBC theory) is a class of new classical macroeconomics models in which business-cycle fluctuations are accounted for by real, in contrast to nominal, shocks. [1] RBC theory sees business cycle fluctuations as the efficient response to exogenous changes in the real economic environment.
The American mathematician and economist Richard M. Goodwin formalised a Marxist model of business cycles known as the Goodwin Model in which recession was caused by increased bargaining power of workers (a result of high employment in boom periods) pushing up the wage share of national income, suppressing profits and leading to a breakdown in ...
As business cycle fluctuations arise naturally in this setup, the Brock–Mirman model became the foundation of real business cycle theory, which is at the heart of modern macroeconomics and growth theory. [2] [3]
Early real business-cycle models postulated an economy populated by a representative consumer who operates in perfectly competitive markets. The only sources of uncertainty in these models are "shocks" in technology. [2] RBC theory builds on the neoclassical growth model, under the assumption of flexible prices, to study how real shocks to the ...
New classicals abandoned the monetarist belief that monetary policy could systematically impact the economy, [102] and eventually embraced real business cycle models that ignored monetary factors entirely. [103] New classicals broke with Keynesian economic theory completely while monetarists had built on Keynesian ideas. [104]
Prior to the late 1990s, macroeconomics was split between new Keynesian work on market imperfections demonstrated with small models and new classical work on real business cycle theory that used fully specified general equilibrium models and used changes in technology to explain fluctuations in economic output. [3]
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The Solow model assumes that labor and capital are used at constant rates without the fluctuations in unemployment and capital utilization commonly seen in business cycles. [33] In this model, increases in output, i.e. economic growth, can only occur because of an increase in the capital stock, a larger population, or technological advancements ...