Some Skeptical Observations on Real Business Cycle Theory

The increasing ascendancy of real business cycle theories of various stripes, with their common view that the economy is best modeled as a floating Walrasian equilibrium, buffeted by productivity shocks, is indicative of the depths of the divisions separating academic macroeconomists. These theories deny propositions thought self-evident by many academic macroeconomists and all of those involved in forecasting and controlling the economy on a day-to-day basis. They assert that monetary policies have no effect on real activity, that fiscal policies influence the economy only through their incentive effects, and that economic fluctuations are caused entirely by supply rather than demand shocks.