How Does it Matter?
29 Pages Posted: 15 Jan 2007 Last revised: 29 Sep 2010
Date Written: December 1991
This paper argues that the distinctions among different current theories of the business cycle do not have the force usually assumed in their behalf in discussions of macroeconomic policy. The distinction between aggregate demand and aggregate supply as the principal location of the disturbances that drive business cycles the distinction most popularly associated with 'real business cycle' models -- is, from a policy perspective, less important than is commonly believed. The policy prescriptions that follow from these models have more to do with the kinds of assumptions that they incorporate about how markets function than with whether the chief disturbances to which the economy is subject work through demand or supply. At the same time, a further set of distinctions not customarily addressed in the business cycle literature, mostly revolving around the definition of 'income,' turns out to be surprisingly important. Finally, yet further issues, which traditionally receive too little attention from economists, arise from the fact that the people and the business institutions that make up the private sector of a modern industrialized economy are vastly heterogeneous, and that democratic forms of government, for all their virtues, have not been very effective in arranging appropriate transfers from one group to others as the need arises.
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