Neoclassical and Neo‐Neoclassical Real Business Cycle Theory

Abstract This chapter and the next review two schools of thought on the role of non‐monetary forces acting through non‐monetary channels in the generation of macroeconomic fluctuations. The subject in this chapter is the theory that its developers call ‘real business cycle theory’, and sometimes ‘the real business cycle theory’ as if all good non‐monetary theory had to be like theirs. The distinguishing feature of these models is their classical style, but the classical approach is not another manifestation of New Classical thinking. What was ‘new’ in that thinking was the incorporation of local, or non‐global, information into a general micro–macro model with rational expectations––but the ‘real business cycle’ models dispense with that feature altogether. Typically, they are, at least from a formal standpoint, essentially classical models of a single‐agent economy, and the classical single agent––Robinson Crusoe in the usual treatment of him––does not have the New Classical (and Keynesian) problem of inferring the data in unobserved parts of the economy.