re: #642 Aceofwhat?

In 1982 Prescott and Kydland wrote a paper that fundamentally challenged the Keynesian view that changes in aggregate demand for goods and services drive the business cycle. Prescott’s and Kydland’s article was squarely in the rational-expectations tradition of robert lucas, who had demonstrated that a fundamental problem of standard Keynesian and monetarist models was that their posited relations between aggregate variables (say, consumption and income) were assumed to hold regardless of government policy.

Prescott and Kydland speculated that changes in technology could generate many of the fluctuations in employment and output that had been noted in the past, and that changes in aggregate demand were not necessary to explain such fluctuations. In particular, they showed that if the elasticity of supply of labor is three, and if various “shocks” (i.e., unanticipated changes) in total factor productivity (TFP) are persistent and of the right magnitude, their model could account for 70 percent of the fluctuation in output in the postwar United States.

Interesting stuff.

So the secret to fixing a depression is finding the right technoligy?

(Non sarcastic)