Why Do We Have Business Cycles? A Stock Flow Consistent Explanation

Standard Real business cycle (RBC) models explain the fluctuations in output, employment, and real wages exclusively as the result of positive or/negative technological shocks. To achieve a deeper insight of the fundamental interaction between technological change and real economic variables we developed a Stock Flow Consistent Analysis of an ‘innovation-based’ business cycle, taking place inside a monetary economy. Unlike RBC models we will thus clarify the role of finance in a technological change process. The model reproduces many of the most relevant insights of Schumpeter’s theory of business cycles.