Monetary RBC
The first several pages of this article are fragmented summaries of prior RBC research. The only parts I could recognize as being Stockman’s thoughts were lists he made of similarities and virtues of RBC theory. He was also more interested in reporting the actual numbers found by different research than explaining their significance, which just added to my general dismay and confusion. His main argument in favor of RBC theory is that it can be used to explain how shocks will impact the economy between quarters. When describing the parameters for RBC, he includes focuses on rates more than static variables, which may be more beneficial for forecasting using these models. Specifically, he discusses the discount rate (how individuals value the future), the rate of capital depreciation, substitution in consumption and leisure, etc. In reality, I think that at best these could be used to forecast only one quarter into the future as they are limited in their progression. However, if someone can figure out a way for me to substitute 150% of my time for leisure, I am all ears.
One of the more interesting points in Stockman’s extensive lit survey relate to how business cycles relate to long run growth. He believes that the LR and SR growth are interrelated. SR trends are also called nonstationary movements, around the LR (stationary) trend. Some even argue that variation in SR trends may actually be indicative of a change in LR behavior. Further research also compared seasonal fluctuations to the business cycle, finding a high correlation between them. This indicates that business cycles may not be completely random, but rather the manifestation of rational behavior given seasonal phenomena (such as consumers buying more during Christmas season).
Stockman then has an incredibly defensive section where he outlines different arguments against RBC theory. Particularly in his discussion of the incredibility of technology shocks, his most compelling argument is that he doesn’t see anyone else coming up with a better idea. The only arguments that he really seems to take seriously are those which state that monetary changes impact business cycles (which makes sense, considering he worked for the Cleveland Fed).
Ultimately, he remains ambiguous in his discussion of the role of monetary policy. While recessions may be uncomfortable, he holds that they may just be individuals and firms rationally adjusting their behavior to the optimal level. Nonetheless, he believes that monetary shocks are possible, and in those instances monetary policy may be used effectively. But since economists don’t really know how business cycles work, they shouldn’t do anything until they figure it out. Excellent.
Stockman, Alan C. 1988. “Real Business Cycle Theory: a Guide, an Evaluation, and New Directions.” Cleveland Federal Reserve Quarterly Journal.
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