ABSTRACT
Business cycle theories can be divided into two groups: theories where entrepreneurial errors drive the cycle, and theories where errors play a secondary or negligible role. The traditional Austrian theory of the business cycle falls into the former category, whereas most varieties of real business cycle theory fall into the latter category. The Austrian view postulates that entrepreneurs make systematic mistakes (in response to monetary policy), and the real business cycle mechanism does not rely on individual mistakes at all. Risk-based theories, as considered in the next two chapters, provide a middle ground or halfway house between these two views.
