[2212] Of fluctuations and market failures

This model provides an example of an economy where real shocks drive output movements. Because the economy is Walrasian, the movements are the optimal responses to the shocks. Thus, contrary to the conventional wisdom about macroeconomic fluctuations, here fluctuations do not reflect any market failures, and government interventions to mitigate them can only reduce welfare. In short, the implication of real-business-cycle models, in their strongest form, is that observed aggregate output movements represent the time-varying Pareto optimum. [Real-Business-Cycle Theory. Advanced Macroeconomics. David Romer. 2006]