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A perspective on modern business cycle theory

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  • Nobuhiro Kiyotaki

Abstract

In this article I provide a perspective on the current state of modern business cycle theory. This theory has developed from an application of the Arrow-Debreu general equilibrium framework to the neoclassical growth model. On the positive side, this approach is able to accommodate various sources of heterogeneity in preferences and production within its complete markets framework. On the negative side, this approach has to rely on persistent exogenous shocks to account for business cycles since its internal propagation mechanism is weak. I discuss the implications of three important extensions of the basic framework. The first two extensions, noncompetitive pricing and frictional labor markets, do not overcome the basic weakness of limited propagation. The third extension, limited insurance and exogenous credit constraints, shows promise to account for the amplification and propagation of exogenous shocks.

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  • Nobuhiro Kiyotaki, 2011. "A perspective on modern business cycle theory," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 97(3Q), pages 195-208.
    • Handle: RePEc:fip:fedreq:y:2011:i:3q:p:195-208:n:v.97no.3
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    Cited by:

    1. Olkhov, Victor, 2019. "New Essentials of Economic Theory," MPRA Paper 95065, University Library of Munich, Germany.
    2. Ngoc‐Sang Pham & Hien Pham, 2021. "Effects of credit limit on efficiency and welfare in a simple general equilibrium model," International Journal of Economic Theory, The International Society for Economic Theory, vol. 17(4), pages 446-470, December.
    3. Victor Olkhov, 2018. "Econophysics Beyond General Equilibrium: the Business Cycle Model," Papers 1804.04721, arXiv.org.
    4. Olkhov, Victor, 2018. "Economic Transactions Govern Business Cycles," MPRA Paper 87207, University Library of Munich, Germany.
    5. Giuseppe Vita & Livio Ferrante, 2021. "Is legislation grease or sand to economic growth? An econometric analysis using data from Italian regions before and after the 2008 crisis," European Journal of Law and Economics, Springer, vol. 51(3), pages 541-561, June.
    6. YOSHIKAWA Hiroshi & ARATA Yoshiyuki, 2023. "A Reconsideration of Microeconomic Foundations of Macroeconomics," Discussion papers 23079, Research Institute of Economy, Trade and Industry (RIETI).
    7. Victor Olkhov, 2018. "How Macro Transactions Describe the Evolution and Fluctuation of Financial Variables," IJFS, MDPI, vol. 6(2), pages 1-19, March.
    8. Olkhov, Victor, 2019. "New Essentials of Economic Theory III. Economic Applications," MPRA Paper 94053, University Library of Munich, Germany.
    9. Irawan, Denny & Okimoto, Tatsuyoshi, 2021. "Overinvestment and macroeconomic uncertainty: Evidence from renewable and non-renewable resource firms," Journal of Economic Dynamics and Control, Elsevier, vol. 126(C).
    10. Singh, Amanjot, 2022. "Oil Price uncertainty and labor investment efficiency," Energy Economics, Elsevier, vol. 116(C).
    11. Ayşegül Ladin SÜMER, 2021. "Evaluation of the methodological relationship between real business cycle model and macroprudential policy," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(628), A), pages 57-64, Autumn.
    12. David M. Kemme & Kayhan Koleyni, 2017. "Exchange Rate Regimes and Welfare Losses from Foreign Crises: The Impact of the US Financial Crisis on Mexico," Review of International Economics, Wiley Blackwell, vol. 25(1), pages 132-147, February.
    13. Takuma Kunieda & Akihisa Shibata, 2014. "Credit Market Imperfections and Macroeconomic Instability," Pacific Economic Review, Wiley Blackwell, vol. 19(5), pages 592-611, December.
    14. Olkhov, Victor, 2018. "The Business Cycle Model Beyond General Equilibrium," MPRA Paper 87204, University Library of Munich, Germany.
    15. Olkhov, Victor, 2018. "Economic and Financial Transactions Govern Business Cycles," MPRA Paper 93269, University Library of Munich, Germany.
    16. Victor Olkhov, 2017. "Econophysics of Business Cycles: Aggregate Economic Fluctuations, Mean Risks and Mean Square Risks," Papers 1709.00282, arXiv.org.
    17. Simone Landini & Mauro Gallegati & J. Barkley Rosser, 2020. "Consistency and incompleteness in general equilibrium theory," Journal of Evolutionary Economics, Springer, vol. 30(1), pages 205-230, January.
    18. Krzysztof Piotr Pawłowski & Wawrzyniec Czubak & Jagoda Zmyślona, 2021. "Regional Diversity of Technical Efficiency in Agriculture as a Results of an Overinvestment: A Case Study from Poland," Energies, MDPI, vol. 14(11), pages 1-20, June.

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    Keywords

    Labor market; Business cycles;

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