Real Business Cycle Theory

Real Business Cycle (RBC) Theory is an economic concept suggesting that fluctuations in the economy—like booms and recessions—are mainly caused by real (non-money) factors such as changes in productivity, technology, or resource availability. When productivity improves, the economy grows; when it declines, activity slows down. RBC attributes these cycles to the way individuals and businesses respond rationally to these changes, investing more or less accordingly. It emphasizes that economic ups and downs are natural responses to real-world conditions, rather than primarily driven by monetary or fiscal policy.