Real Business Cycles

Chapter 2A user’s guide to solving real business cycle models

The typical real business cycle model is based upon an economy populated by identical infinitely lived households and firms, so that economic choices are reflected in the decisions made by a single representative agent. It is assumed that both output and factor markets are characterized by perfect competition. Households sell capital, k_t, to firms at the rental rate of capital, and sell labor, h_t, at the real wage rate. Each period, firms choose capital and labor subject to a production function to maximize profits. Output is produced according to a constant-returns-to-scale production function that is subject to random technology shocks. Specifically y_t = z_tf (k_t, h_t), where y_t is ...