A Perspective on Modern Business Cycle Theory

14 Pages Posted: 19 Dec 2012

See all articles by Nobuhiro Kiyotaki

Nobuhiro Kiyotaki

Princeton University - Department of Economics

Date Written: September 1, 2011

Abstract

In this article I provide a perspective on the current state of modern business cycle theory. This theory has developed from an application of the Arrow-Debreu general equilibrium framework to the neoclassical growth model. On the positive side, this approach is able to accommodate various sources of heterogeneity in preferences and production within its complete markets framework. On the negative side, this approach has to rely on persistent exogenous shocks to account for business cycles since its internal propagation mechanism is weak. I discuss the implications of three important extensions of the basic framework. The first two extensions, noncompetitive pricing and frictional labor markets, do not overcome the basic weakness of limited propagation. The third extension, limited insurance and exogenous credit constraints, shows promise to account for the amplification and propagation of exogenous shocks.

Suggested Citation

Kiyotaki, Nobuhiro, A Perspective on Modern Business Cycle Theory (September 1, 2011). FRB Richmond Economic Quarterly, vol. 97, no. 3, Third Quarter 2011, pp. 195-208, Available at SSRN: https://ssrn.com/abstract=2190594

Nobuhiro Kiyotaki (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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