A Critical Analysis of the Main Theoretical and Methodological Tenets of Real Business Cycle Theory. Is It Suitable to Understand the Global Financial Crisis of 2007/08?

Essay from the year 2018 in the subject Economics - Macro-economics, general, grade: 1,9, School of Oriental and African Studies, University of London, language: English, abstract: “Why did nobody notice it?” asked Queen Elizabeth II. during a visit at London School of Economics (Pierce 2008). She referred to the Global Financial Crisis 2007/08 (GFC). Why did economists fail to advise politicians inasmuch as crises do not arise? The Real Business Cycle theory (RBCT) was a common framework of analysing economics. Important representatives of RBCT are Edward C. Prescott and Finn E. Kydland. Both won the Nobel prize in economic sciences in 2004 inter alia for their contributions to understand driving forces behind business cycles (BCs) (The Nobel Prize 2018). This essay will analyse how useful RBCT and its policy prescriptions are in understanding and dealing with the GFC. The thesis statement of this essay is that RBCT and its policy implications are not suitable to understand or deal with the GFC. First of all, I will give an overview of RBCT. Subsequently, its strengths and weaknesses will be analysed. Then, the GFC will be explained. Afterwards, this essay will contain a comparison between RBCT and Marx’s crisis theory as well as Minsky’s financial instability hypothesis (FIH). Finally, the appropriateness of RBCT and its policy prescriptions to deal with the GFC will be discussed.