<p>Following <a href="https://press.princeton.edu/books/hardcover/9780691164786/monetary-policy-inflation-and-the-business-cycle" rel="nofollow noreferrer">Galí (2015, p.3)</a> the RBC model rests in three major assumptions: i) the efficiency of business cycle, ii) technology shocks as source of economic fluctuations, iii)   the limited role of monetary factors. The main flaws may come from i) and iii), in a nutshell iii) implies that monetary policy (and broadly monetary factors) are fully neutral in every timescope to real variables, e.g. an increment of money supply would not have effects to consumption, GDP and output neither in the short nor in the long term, as Galí explains this is at odds with some widely accepted evidence.</p>
<p>In the other hand i) implies that economic fluctuations are efficient responses to technology shocks, and thus any intervention would have distortionary (undesired) effects to this efficient response, nonetheless this &quot;flaw&quot; is actually more a theoretical interpretation of what a recession/expansion is, in Galí's words:</p>
<blockquote>
<p>[...] According to that view, cyclical
fluctuations did not necessarily signal an inefficient allocation of resources
(in fact, the fluctuations generated by the standard RBC model were fully
optimal). That view had an important corollary: Stabilization policies may
not be necessary or desirable, and they could even be counterproductive.
This was in contrast with the conventional interpretation, tracing back to
Keynes (1936), of recessions as periods with an inefficiently low utilization
of resources that could be brought to an end by means of economic policies
aimed at expanding aggregate demand.</p>
</blockquote>
<p>I think that would be the generic answer, also I would suggest to read the mentioned reference introduction to have a more in depth understanding of this discussion.</p>

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2021-10-18T03:44:48.977Z
2021-10-18T03:44:48.977Z
manifold
<p>Looking for a generic answer to this question and potentially literature etc. that will help me study this question. Thanks in advance.</p>

<macroeconomics><reference-request><new-keynesian-economics><rbc>
What are the major flaws of the RBC model and how does the New Keynesian model address them?
Emma Tilda
# What are the major flaws of the RBC model and how does the New Keynesian model address them?

(Asked by: username_0 on 2021-10-17)

Looking for a generic answer to this question and potentially literature etc. that will help me study this question. Thanks in advance.

**Tags:** macroeconomics, reference-request, new-keynesian-economics, rbc

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## 1 answers

### Answer by username_1 on 2021-10-18. Score: 2

Following [Galí (2015, p.3)](https://press.princeton.edu/books/hardcover/9780691164786/monetary-policy-inflation-and-the-business-cycle) the RBC model rests in three major assumptions: i) the efficiency of business cycle, ii) technology shocks as source of economic fluctuations, iii) the limited role of monetary factors. The main flaws may come from i) and iii), in a nutshell iii) implies that monetary policy (and broadly monetary factors) are fully neutral in every timescope to real variables, e.g. an increment of money supply would not have effects to consumption, GDP and output neither in the short nor in the long term, as Galí explains this is at odds with some widely accepted evidence.

In the other hand i) implies that economic fluctuations are efficient responses to technology shocks, and thus any intervention would have distortionary (undesired) effects to this efficient response, nonetheless this "flaw" is actually more a theoretical interpretation of what a recession/expansion is, in Galí's words:

> [...] According to that view, cyclical
> fluctuations did not necessarily signal an inefficient allocation of resources
> (in fact, the fluctuations generated by the standard RBC model were fully
> optimal). That view had an important corollary: Stabilization policies may
> not be necessary or desirable, and they could even be counterproductive.
> This was in contrast with the conventional interpretation, tracing back to
> Keynes (1936), of recessions as periods with an inefficiently low utilization
> of resources that could be brought to an end by means of economic policies
> aimed at expanding aggregate demand.

I think that would be the generic answer, also I would suggest to read the mentioned reference introduction to have a more in depth understanding of this discussion.


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