The Great Moderation, Real Business Cycles, and Dynamic General Equilibrium Models

Abstract

This chapter, initially describes the role of innovation and human capital as perceived by the endogenous growth theory. It defines the externalities which lead to market imperfections posited by the New Keynesian thought. Furthermore, the Real Business Cycle Theory is presented, with a discussion of supply shocks and technological shocks according to Dynamic Stochastic General Equilibrium models (DSGE). The last parts of the chapter, present the operation of Central Banks during the period of the Great Moderation and Post-Keynesian Economics and the Financial Instability Hypothesis.