Suggestions on Quantitative Business Cycle Theory (Annual Survey)

The aim of business cycle theory is to explain certain movements of economic variables. Therefore, the basic question to be answered is in what ways movements of variables may be generated. In answering this question it is useful to distinguish between exogen and endogen movements, the former being movements during which certain data vary, while, in the latter, the data are supposed to be constant. Since in a static theory (e.g., the JJ7alrasian system) the values of all the variables are determined by the data at the same moment, this theory does not admit endogen movements. A dynamic theory is therefore necessary, a theory being called "dynamic" when variables relating to different moments appear in one equation. Of course, exogen movements are possible in a dynamic theory as well as in a static one. Business cycle research shows that a dynamic theory is necessary to explain facts and so business cycle theory is not possible within the field of static theory.