Kingston Masters Political Economy 05: Neoclassical Growth theory, RBC & DSGE models

I cover the reasons why the Neoclassical growth model–on which both RBC (Real Business Cycle) and DSGE (Dynamic Stochastic General Equilibrium) models are based–has an unstable equilibrium. Given their Neoclassical fetish for seeing stable equilibrium everywhere, this was not at all the mathematical result they would have wanted.

But as usual they turned failure into a virtue by developing the idea of “jump” variables in dynamic systems, not worrying that this jump relied upon consumers having the combined wisdom of Solomon and Nostradamus.