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Real Business Cycles

Staff Report 370 | Published February 1, 2006

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Real Business Cycles


Real business cycles are recurrent fluctuations in an economy’s incomes, products, and factor inputs—especially labor—that are due to nonmonetary sources. These sources include changes in technology, tax rates and government spending, tastes, government regulation, terms of trade, and energy prices. Most real business cycle (RBC) models are variants or extensions of a neoclassical growth model. One such prototype is introduced. It is then shown how RBC theorists, applying the methodology of Kydland and Prescott (_Econometrica_ 1982), use theory to make predictions about actual time series. Extensions of the prototype model, current issues, and open questions are also discussed.

Published in: _The New Palgrave Dictionary of Economics_ (2nd Ed., 2008)