TAILIEUCHUNG - Matthias Doepke - Marcroeconomics - Chapter 9

Chapter 9 Business Cycles In this chapter we explore the causes of business cycles. Briefly, business cycles are the recurring fluctuations that occur in real GDP over time. For further descriptions of business cycles, refer to Barro’s Chapter 9. Here, we concentrate on explaining business cycles. | Chapter 9 Business Cycles In this chapter we explore the causes of business cycles. Briefly business cycles are the recurring fluctuations that occur in real GDP over time. For further descriptions of business cycles refer to Barro s Chapter 9. Here we concentrate on explaining business cycles. We begin with an overview of potential explanations. Then we work out a real business cycle model in detail. While there are many different theories of business cycles they share some properties. There is always a driving force behind economic fluctuations some sort of shock or disturbance that is the original cause of the cycle. In addition most theories build on a propagation mechanism that amplifies shocks. Unless the disturbances are already big enough by themselves to account for the fluctuations there has to be some propagation mechanism that translates small short-lived shocks into large persistent economic fluctuations. We will start our search for the cause of business cycles in Section by listing a number of possible shocks and propagation mechanisms. Competing theories of the business cycle differ in which shocks and mechanisms they emphasize. In Section we will concentrate on the real business cycle model which is a straightforward extension of the marketclearing models that we developed in earlier chapters. Section presents simulations for our real business cycle model and assesses the success of the model in matching real-world fluctuations. Shosks and Propagation Mechanisms Among the many shocks and disturbances that are present in an economy only a few have received special attention in research on business cycles. Here are some of the more important candidates 70 Business Cycles Technology shocks Real-world production functions change over time. New technologies like computers or robots alter the production process and raise overall productivity. Sometimes production facilities break down or do not work as expected so productivity falls. This

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