964 0 0 0 15 20c0 2. 984 0 0 0 19 8c2. Contrary to what How do changes in investment spending affect the business cycles, Monetarist, and new classical economicsts believed, RBC theorists, starting with Nelson and Plosser in 1982, found that the hypothesis that GDP growth follows a random walk cannot be rejected.

They argued that most of the changes in GDP were permanent, and that output growth would not revert to an underlying trend following a shock. They use a representative agent framework, thereby avoiding aggregation problems. Kydland and Prescott’s time-to-build model, for example, assumes that it takes 4 quarters to build capital. In the history of economic thought, a process of elimination led to the ascendance of RBC theory in the literatue on business cycles. Essentially, the success of the Rational Expectations hypothesis — or, more broadly stated, the idea that economic agents do not make systematic mistakes — was severely damaging to other business cycle theories. Persistence: Cycles must not be instantaneous, but must last for some period of time. Comovement: Different sectors or industries within the economy must experience the effects of the cycle concurrently.