Macroeconomic Frictions: What Have We Learned from the Real Business Cycle Research Programme?

Two extreme, definitive, answers to the question posed in the title and one more murky and incomplete can be contemplated. The first holds that we have learned nothing from the Real Business Cycle (RBC) programme on the subject of frictions simply because it has nothing to teach us: the RBC programme is the wrong research programme, a mistaken detour in our attempt to understand short-run macroeconomic phenomena. One stated reason for such a view, phrased by Bob Solow in this volume, is that the underlying neoclassical growth model was designed to be a model for the long run, a time horizon at which one may hold that all the necessary price and wage adjustments have been made. It is thus not an appropriate model for studying short-run phenomena, fluctuations occurring at quarterly frequencies, a time horizon where, to the contrary, the flex wage and price hypothesis must be a priori ruled out.