Real Business Cycles in a Keynesian Macro Model

Howard F Naish

Oxford Economic Papers, 1993, vol. 45, issue 4, 618-38

Abstract: Imperfectly competitive Keynesian macro models provide a simple, plausible account of real business cycles. These cycles are the result of rule-of-thumb pricing policies followed by firms, rather than a by-product of intertemporal optimization by a representative, rational consumer. Three rules are considered: a mark-up rule; a price leadership rule; and a rule based on adaptive expectations. In each case, random productivity shocks lead to cyclical movements in output and employment. Simulations indicate that the losses associated with each rule are often trivially small. If rational expectations imply some information costs, simple pricing rules may be almost optimal. Copyright 1993 by Royal Economic Society.

Date: 1993
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