ABSTRACT
This chapter explores the evolution of Real Business Cycles Theory (RBC) and explains why it has been so successful and why it is now under severe scrutiny. It explains the starting point of RBC and point out that it was a bold conjecture because it challenged the established wisdom on economic cycles. The departure point of RBC theory is Solow's growth theory. The Keynesian economy is always out of equilibrium, so it is necessary to devote a lot of effort to analyze the causes of the disequilibrium and how to avoid it. General Equilibrium Theory was incompatible with Keynesian macroeconomics, but RBC theory is not. One outstanding consequence of the theory concerns the effectiveness of economic policy. The chapter shows Gross domestic product (GDP) figures for Germany, Japan, the US and the UK from 1986 and 2006. The analysis of aggregate fluctuations must distinguish between impulse mechanisms and transmission mechanisms.
