Afghan real business cycle theory

For the past decade, billions of dollars in American aid poured into one of the world’s poorest countries, providing previously unimaginable opportunities to thousands of Afghan workers.

Now, the boom is over. The Afghan economy, which had been expanding by as much as 14 percent a year, has slumped. Growth this year is expected to be just 3.2 percent, according to the World Bank. That slowdown reflects the declining American spending and also apprehension about security.

There is more here, tragic throughout.  I like to say to my students “no matter how many good arguments you think you have against real business cycle theory, it explains an overwhelming preponderance of the business cycles in the history of the human race.”

And don’t get any silly ideas from seeing the word “spending” in that text above.  This is an RBC story, and while nominal rigidities may well play a further role in the contraction, ups and downs in the real demand for Afghani products is the driving factor.  If an economist wins a Nobel Prize and suddenly is in stronger demand on the lecture circuit, that is mainly an “RBC boom” for that economist, not a Keynesian mechanism just because others are “spending more” on him or her.


Comments for this post are closed