"The purpose of the original RBC models was not necessarily to argue that these models represented an accurate portrayal of the business cycle, but rather to see how much of the business cycle could be explained without the appeal to frictions. The basic idea is that there could be shocks to tastes and/or technology and that these changes could cause fluctuations in economic activity. Furthermore, since the RBC model was a frictionless model, any such fluctuations would be efficient. This conclusion was important. We typically think of recessions as being inefficient and costly. If this is true, countercyclical policy could be welfare-increasing. However, if the world can be adequately explained by the RBC model, then economic fluctuations represent efficient responses to unexpected changes in tastes and technology. [..] The idea behind the real business cycle model is that fluctuations in aggregate productivity are the cause of economic fluctuations. If all firms are identical, then any decline in aggregate productivity must be a decline in the productivity of all the individual firms. But why would firms become less productive? [..] Suppose that you have a bunch of different firms producing different goods and these firms have different levels of productivity. In this case, an aggregate productivity shock is simply the reallocation from high productivity firms to low productivity firms or vice versa. [..] the RBC model essentially suggests that fluctuations in the economy are driven by the reallocation of inputs between firms with different levels of productivity [..] What are the sources of reallocation? For example, if the reallocation is due to changes in demographics and/or preferences, then these reallocations could be interpreted as efficient responses to structural changes in the economy and be seen as efficient. However, if these reallocations are caused by changes in relative prices due to, say, monetary policy, then the welfare and policy implications are much different. [..] what we should do is try to disaggregate productivity, determine what causes reallocation, and try to assess whether this is an efficient reallocation or should really be considered misallocation."
