David Bourget (Western Ontario)
David Chalmers (ANU, NYU)
Rafael De Clercq
Jack Alan Reynolds
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Critical Review 5 (2):291-299 (1991)
Real business cycle theory, as exemplified by Fischer Black's Business Cycles and Equilibrium, posits that business cycles are due to random ?technology shocks,? and not to monetary, fiscal or other government policies. Rational expectations and complete markets are supposed to enable decision makers to avoid the costly mistakes that would otherwise result from policies that distort incentives to borrow and invest. This paper questions the assumptions of rational expectations and complete markets from an Austrian?school perspective. It argues that decision makers economize on information costs by basing their plans at least in part on the actual prices observed in the course of doing business, and that government regulations have impinged on the evolution of markets, leaving them far from complete.
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