Central Bank Balance Sheet and Real Business Cycles

Chapter 9 Real Business Cycles

The modern theory of business cycles originated from policy actions taken to address the Great Depression. While Keynesian economic models originally gained credibility and traction among economists after its central tenets (reduction in interest rates, government investment in infrastructure) were successful in tackling the Great Depression, the bouts of stagflation experienced during the 1970s, the absence of microeconomic theories, and inability of Keynesian models to predict policy changes challenged the assumptions of Keynesian economics and dented its popularity as an ethos to tackle economic downturns. The shortcomings of Keynesian theories of business cycles led to the development of the real business cycle ...