The researchers go on to show that if you make the model more realistic along any of a number of dimensions -- firms taking a little time to adjust their production to new levels, for example, rather than doing so instantaneously -- you always end up with an inherently unstable economy. The conclusion is pretty much the opposite of what the Real Business Cycle theory's creators originally intended. They wanted to defend the notion that markets work perfectly, not to entertain the possibility that recessions might reflect an inability of markets to coordinate supply and demand. Their own model actually destroys that hope.
It's an amusing and ironic outcome, with implications beyond recessions. For years, many economists have argued that their assumptions of perfect rationality, self-interest and equilibrium are merely convenient elements in valuable thought experiments; they learn about the real world despite the manifestly false assumptions. That position now looks completely indefensible. It looks more as if Big Shock theorists are worried that relaxing their assumptions will lead to some very different and very inconvenient conclusions.
This isn't to say that we know for sure what really causes big recessions. Big shocks, little shocks and inherent instability may all play a role. It will take some honest science to figure that out.
What Causes Big Recessions?
August 26, 2014
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I've thought about this in the context of our current situation and the lack of a boom bust cycles. This is based on some work that a consultant, name escapes me, did showing how the US economy has become less volatile the past eighty years. Yes, we then had the big 2007 shock but that was easy, in retrospect, to see as an asset bubble. Absent that kind of issue it seems to me that all this management theory taught in MBA schools thirty years ago, inventory management, process theory, capital allocation, has resulted in companies that really do manage their inputs better and mitigate the need for panic cutting that leads to recessions. Not saying that a recession could never happen but that we now have some built-in tail winds. Of course, one of the results of better management is that labor is treated like one more input with the resulting lower wages and more precarious futures.