A Critical Reflection on Real Business Cycle Models

Abstract

In 1970s and 80s of the last century two macroeconomic frameworks developed in parallel: (i) the Real Business Cycles (RBC) theory and (ii) the New Keynesians framework. The RBC theory revolutionized the macroeconomic framework with a new methodology and theory around the aggregate output fluctuations: RBC models introduced the use of Dynamic Stochastic General Equilibrium (DSGE) models and postulated the impact of real shocks to explain the business cycle fluctuations. Almost thirty years later, Rebelo presented some of the challenges that faced the theoretical edifice built by Kydland and Prescott. The main goal of this critical review is to update the open questions in RBC models and discuss about the innovations around them in the last decade. This brief research concluded that the extensions (such as impatience and laziness shocks or distortionary taxes, for example) in the shocks beside technological and government provides relevant contributes to improves the model predictions concerning additional approximation to the stylized facts of business cycles.