An Introduction to Economic Dynamics

12 BUSINESS CYCLES II: THE REAL BUSINESS CYCLE MODEL

DOI: 10.4324/9780429324406-12

12.1 ECONOMIC PROBLEM

The family of business cycle models can be divided into two broad groups. In one group we can assimilate all the models that consider the economy from an aggregate point of view and argue that the business cycle fluctuations are driven mainly by the volatility in the aggregate variables, such as the investment expenditure, due to a wide range of reasons from non-realisation of expectations to animal spirits. Broadly speaking, this group of aggregate economy models can be labelled as the Keynesian business cycle models with notable examples including Samuelson and Hick’s Multiplier-Accelerator models seen in Chapter 11. The second group ...