Prisme N°22
Paul De Grauwe
Prisme N°22 October 2011 (481.0 KiB)
Capitalism is characterized by booms and busts. Periods of strong growth in output alternate with periods of declines in economic growth. Every macroeconomic theory should attempt to explain these endemic business cycle movements. In this text, I present two paradigms that attempt to explain these booms and busts. One is the Dynamic Stochastic General Equilibrium (DSGE) paradigm, in which agents have unlimited cognitive abilities. The other paradigm is a behavioural one, in which agents are assumed to have limited cognitive abilities. These two types of models produce radically different macroeconomic dynamics. I analyse these differences. I also study the different policy implications of these two paradigms.
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