Do Technology Shocks Cause Boom-Bust Cycles?

Some economists, such as Finn Kydland and Edward C. Prescott (KP)—the 2004 Nobel Laureates in economics—believe that a major cause behind economic boom-bust cycles is technology shocks. KP Boom-Bust ModelWhat is the mechanism in the KP framework that converts the technology shock into the boom-bust cycles? Notwithstanding the calibration method, KP still employ a fixed-parameters model to establish the importance of the technology shock in setting the boom-bust economic cycles. The source of the boom-bust cycles turns out to be the alleged “protector” of the economy—the central bank itself. Various mathematical models that have supposedly established that changes in technology are the key driving factor of the boom-bust cycles do not address the causes of boom-bust cycles but rather describe fluctuations of the data.