This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. Journal of Economic Perspectives
  4. Summer 1989
  5. Real Business Cycles: A New Keynesian Perspective

Journal of Economic Perspectives

ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)

Real Business Cycles: A New Keynesian Perspective

  • N. Gregory Mankiw
Journal of Economic Perspectives
vol. 3, no. 3, Summer 1989
(pp. 79–90)
Download Full Text PDF
(Complimentary)

Abstract

Real business cycle theory is the latest incarnation of the classical view of economic fluctuations. It assumes that there are large random fluctuations in the rate of technological change. In response to these fluctuations, individuals rationally alter their levels of labor supply and consumption. The business cycle is, according to this theory, the natural and efficient response of the economy to changes in the available production technology. In this essay, I appraise this newly revived approach to the business cycle. In my view, real business cycle theory does not provide an empirically plausible explanation of economic fluctuations. Both its reliance on large technological disturbances as the primary source of economic fluctuations and its reliance on the intertemporal substitution of leisure to explain changes in employment are fundamental weaknesses. Moreover, to the extent that it trivializes the social cost of observed fluctuations, real business cycle theory is potentially dangerous. The danger is that those who advise policymakers might attempt to use it to evaluate the effects of alternative macroeconomic policies or to conclude that macroeconomic policies are unnecessary.

Citation

Mankiw, N Gregory. 1989. "Real Business Cycles: A New Keynesian Perspective." Journal of Economic Perspectives 3 (3): 79–90. DOI: 10.1257/jep.3.3.79

JEL Classification

  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
  • E13 General Aggregative Models: Neoclassical
  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • E31 Price Level; Inflation; Deflation
  • E32 Business Fluctuations; Cycles
  • O33 Technological Change: Choices and Consequences; Diffusion Processes
  • O41 One, Two, and Multisector Growth Models