Real business cycle theory

ABSTRACTREAL BUSINESS CYCLE THEORYAli ACARAVCIPh.D. Thesis, Economics DepartmentSupervisor: Prof. Dr. Erhan YILDIRIMSeptember 2006, 140 pagesAccording to Real Business Cycle (RBC) theory, fluctuations in economicactivity have emerged as a result of economic agents? optimal response to stochasticshocks on productivity. Exogenous productivity shocks and intertemporal substitutionhave constituted the impulse mechanism and propagation mechanism respectively.Augmented Reel Business Cycle (ARBC) models have been developed to eliminate theinadequacies of the first RBC models.The RBC approach has also concerned qualitative features of cycles called asstylized facts. Employment, real wages and labor productivity are procyclical in Turkishmanufacturing industry. Besides this prices and inflation are countercyclical. Theseobservations are consistent with the expectations of the RBC theory.Business cycles in Turkish economy had been analysed by using stochasticgeneral equilibrium models. Standard RBC model (King, Plosser ve Rebelo, 1988) haslower explanation power. Indivisible labor (Hansen, 1985) and cash-in-advance (Cooleyve Hansen, 1989) business cycle models have better simulation results than standardmodel. The augmented RBC model with fiscal policy variables (Baxter ve King, 1993)has very close results to relative volatilities in data.Keywords: Business Cycle, Stylized Facts, Turkish Economy, Calibration,Computational Experiment.