KEYNESIAN REAL BUSINESS CYCLES IN A NEOCLASSICAL FRAMEWORK

Simple, old fashioned Keynesian models of cyclical fluctuations provid e a legitimate alternative to neoclassical real business cycle models. Not only can these models mimic many of the characteristics of actual business cycles, the ad hoc behavioral rules on which they are based are vastly simpler and easier to calculate than the often insoluble ma ximization problems faced by representative agents in neoclassical mod els. In addition, these simple rules often imply a negligible loss of utility compared to that achieved when decision rules are derived as s olutions to an intertemporal optimization problem. As a result, even t hough Keynesian models ate apparently based on suboptimal behavior by individual agents, one cannot assume that these models are dominated b y neoclassical alternatives.