In a post pushing for attention to Real Business Cycle models Garret Jones concludes

It’s usually hard to fit RBC into partisan political narratives, which helps explain why we don’t hear about it much.  But as long as big ideas come in waves, as long as energy supplies depend on the vagaries of global politics, and as long as politicians enact policies that weaken confidence in the health of a nation’s economic institutions, RBC will matter.

This misunderstands why folks such as myself dismiss discussions of real business cycles (RBC) in the context of macro-economic management.

If your argument was that, in RBC we have a plausible explanation for the co-movement of lots of economic variables and the emergence of booms and busts over time then that’s fine. This may even be a topic of some non-academic interest. Though, aside from the confidence issue, its not immediately clear why.

The key problem, however, is that RBC doesn’t explain the failure of markets to clear and lots of folks report experiences that are damn close what we would expect if markets didn’t clear.

For example, suppose a boom hit and as a result wages and profits rose in the economy. Then later a bust hit and wages and profits fell. Yet, all the while people who wanted a job could get one and relative prices moved up and down but the total buying power of a dollar was stable. In that case I would say that it would be nice to have more booms and we it could be worthwhile to institute policy to help folks during the bust, but by and large, them’s the apples.

Unless we seriously think we can outperform a competitive market equilibrium it would be best not to go monkeying around with things.

Yet, this is not what happens. People look for jobs and can’t find them. Price changes can reverse course almost in unison. Something is going on here.

Even if that something had its origin in a technology shock, what makes it of interest to us is the failure of market clearing. Principally, to beat drum, that people tell us they are looking for jobs but cannot find them.

Moreover, we have evidence that we can help the market to clear by altering monetary policy. So, if a technology driven boom like the late 90s comes along and employers cannot find workers then we can help clear the market by raising interest rates. If the technology shock then fades and it turns out that workers cannot find jobs we can help matters by lowering interest rates.

The point is that regardless of the original source of the co-movement of economic variable what we are interested in is the failure of the economy to adhere to classical intuition. On this key matter not only are RBC models silent, but those brandishing them often dismiss the notion that there is anything to discuss!

This is the real problem with real business cycles.

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