Real Business Cycle (RBC) Theories Are Nonmonetary Explanations of the Business Cycle

Real business cycle (RBC) theories are nonmonetary explanations of the business cycle. Supporters of RBC theory claim that business cycles arise due to changes in real factors, instead of monetary factors, in the economy. The focus is on alleged causes of the business cycle that emanate from places other than changes in the supply of money and spending. Further, such cycle theory assumes markets are always in equilibrium (i.e., they always clear, even during recessions and depressions).

Probably the most popular version of RBC theory claims that changes in the level of technology affect the economy such that it causes fluctuations in output and employment (i.e., a business cycle).

Another RBC theory is the fad theory of the cycle. If a product suddenly comes into fashion, there will be an increase in demand for the product and a boom will be created in the production of that product.... If the expansion is widespread enough, it might create the expansion phase of a general business cycle, according to supporters of this theory. When the fad ends, demand and production decline and create a slump.

--Brian P. Simpson, Remedies and Alternative Theories, vol. 2 of Money, Banking, and the Business Cycle (New York: Palgrave Macmillan, 2014), 79.