Business cycle theory in new classical approach

In the 1970s, Keynesian and Monetarist views have failed to explain high unemployment and inflation problems which were simultaneously experienced in many countries in the world and this has led to the emergence of the New Classical Economics. In this theoretical framework, Imperfect Information, Real Business Cycle and Sectoral Shifts Theories were developed to explain business cycles. According to Imperfect Information Theory, short-run effects of unexpected monetary shocks in business cycles are caused by economic agents' imperfect information about monetary policy and the general level of price. Real Business Cycle Theory explains economic fluctuations by technology shocks. Sectoral Shift Theory tries to examine business cycles by employment and output changes in inter-industries. The impacts of economic fluctuations caused by monetary and real shocks are investigated by employing econometric methods for Turkey. In order to see the effects of monetary shocks in real GNP, Barro's (1977) Two Stage Test Method has been used. The empirical results have showed that monetary policies applied by government have had a statistically significant effect in real GNP in Turkey. Additionally, in this thesis, implications of real business cycle models have been tested by applying Engle- Granger cointegration technique. Even though the empirical findings have indicated long-run relationship between investment and real GNP, such a relationship between real GNP and investment have not detected. These results indicate that real business cycle models have failed to explain business cycles in the Turkish economy.