This title slide is titled "Real Business Cycle Theory." Its subtitle promises a graduate-level overview of its foundations, models, evidence, and critiques.

Real Business Cycle Theory

Graduate-Level Overview of Foundations, Models, Evidence, and Critiques

This agenda slide outlines a presentation on Real Business Cycle (RBC) theory, beginning with its introduction, key assumptions, core model, and Keynesian comparisons. It continues with historical developments, empirical evidence, visuals, key quotes, criticisms, and concludes with final insights.

Presentation Agenda

1. Introduction and Key Assumptions

Overview of RBC theory and its foundational assumptions.

2. RBC Model and Keynesian Comparison

Explanation of the core RBC model and contrasts with Keynesian economics.

3. Historical Timeline and Empirical Evidence

Key historical developments alongside empirical statistics supporting RBC.

4. Visuals, Key Quote, and Criticisms

Illustrative visuals, influential quote, and major theoretical criticisms.

5. Conclusion and Final Thoughts

Synthesis of insights and implications from RBC theory analysis. Source: Graduate-level RBC Theory Presentation

This slide serves as a section header titled "Foundations of RBC Theory." Its subtitle describes RBC theory as a neoclassical framework that explains business cycles through real shocks, not monetary factors.

Foundations of RBC Theory

Foundations of RBC Theory

Neoclassical framework explaining business cycles via real shocks, not monetary factors.

Source: Kydland & Prescott (1982)

The "Core Assumptions" slide lists key principles of the Real Business Cycle (RBC) model. It highlights rational agents who optimize, real shocks from technology/productivity, flexible prices and wages, complete markets, and RBC as an efficient response to shocks.

Core Assumptions

• Rational agents optimize
• Real shocks (technology/productivity)
• Flexible prices and wages
• Complete markets
• RBC as efficient response to shocks

The slide compares Real Business Cycle (RBC) and New Keynesian (NK) models of business cycles. RBC attributes fluctuations to real shocks like technology with continuous market clearing and minimal policy role, while NK emphasizes nominal rigidities amplifying demand shocks and the need for monetary/fiscal intervention.

RBC vs. New Keynesian

This timeline traces the historical development of Real Business Cycle (RBC) models, starting with the 1970s Lucas Critique challenging Keynesian policy evaluation for ignoring rational expectations. It progresses through the 1982 Kydland-Prescott seminal RBC model driven by technology shocks, 1990s extensions revealing indeterminacy and sunspot equilibria, and 2000s integration of financial frictions to better explain crises.

Historical Development

1970s: Emergence of the Lucas Critique Lucas challenges Keynesian policy evaluation for ignoring rational expectations and behavioral changes. 1982: Kydland-Prescott Pioneer RBC Model Seminal paper introduces real business cycle theory driven by technology shocks. 1990s: Model Extensions and Indeterminacy Research reveals indeterminacy issues and sunspot equilibria in extended RBC frameworks. 2000s: Financial Frictions in RBC Models Integration of financial frictions improves RBC models' explanation of crises.

Source: Real Business Cycle Theory Literature

The "Empirical Evidence" slide highlights key statistics: output volatility at 1.6% standard deviation and labor correlation of 0.85 as a comovement measure. It also indicates that 50-80% of business cycles stem from technology shocks per RBC calibration.

Empirical Evidence

• 1.6%: Output Volatility

Std. dev.

• 0.85: Labor Correlation

Comovement measure

• 50-80%: Cycles from Tech Shocks

RBC calibration Source: RBC Calibrations

The "Business Cycle Dynamics" slide compares RBC model simulations to empirical data. It shows matches in GDP persistence and volatility, procyclical hours worked with output, and aligned productivity fluctuations.

Business Cycle Dynamics

!Image

• RBC simulations match GDP persistence and volatility
• Hours worked show procyclical comovement with output
• Productivity fluctuations align between model and data

Source: Real business-cycle theory

The slide, titled "Kydland & Prescott (1982)," quotes Nobel Laureates Finn E. Kydland and Edward C. Prescott. It states: "Business cycles are the efficient response to real shocks," favoring equilibrium fluctuations over traditional disequilibrium views.

Kydland & Prescott (1982)

> "Business cycles are the efficient response to real shocks." This view emphasizes equilibrium fluctuations over traditional disequilibrium explanations.

— Finn E. Kydland & Edward C. Prescott (Nobel Laureates in Economics, 2004; 1982)

The conclusion slide states that RBC theory emphasizes supply-side drivers of business cycles and fosters skepticism toward demand-side policy interventions. It anticipates future hybrid DSGE models blending RBC with New Keynesian elements, ending with thanks and an invitation for questions.

Conclusion & Implications

• RBC highlights supply-side drivers of business cycles

• Fosters policy skepticism toward demand-side interventions
• Future: Hybrid DSGE models blending RBC with New Keynesian elements

Thank you!

Questions & Discussion