Is Real Business Cycle Theory Dead?
No. Real business cycle theory is alive and kicking. If we write Y=a*F(K,L) and call “a” technology then an RBC theory is mostly about how fluctuations in “a” change output. Amusingly, Brad DeLong calls this the great forgetting theory of recessions and indeed it is hard to see how we could forget about technology, thus reducing output in some periods. But this view takes the term technology too literally. I am in my office every day (L=1), my computer is here every day (K=1) but my output and thus my productivity fluctuates. Why? It’s not that I forget how to use STATA. Some days, however, a reporter calls and distracts, another day I need to tidy my office, on other days creativity just doesn’t strike. In short, everyone recognizes that at a micro-economic level productivity fluctuates a lot so why should macro productivity follow a smooth process? In fact, there is a standard answer to that question which is the law of large numbers–spread idiosyncratic productivity shocks across ma
