8 Real Business Cycle Theory With the deemphasis on monetary models of the business cycle proponents of the new classical approach have moved over the last to ten years to analyses that rely on real disturbances as sources of business fluctuations(see Kydland and Prescott, 1982, and the survey by McCallum 1989). These models stress technology shocks or other disturbances to the supply side as central driving forces, but allow an important role for the dynamic elements that influence the ways that shocks propagate are equilibrium in style, featuring cleared, competitive markets; optimizing agents who are typically modeled as representative households with infinit and neoclassical production functions that are sub ject stochastic disturbances. Although the models deemphasize monetary shocks the analysis of propagation mechanisms would apply as much to monetary models as to real models. In the real business cycle (or rBC)framework, any positive correlation between output and money reflects the endogenous response of monetary aggregates(see King and Plosser, 1984) A number of authors have simulated versions of RBC models on u.s. data he underlying parameters of preferences and technology are calibrated to be consistent with findings from cross-sectional studies. In many respects the results accord with observed characteristics of business cycle For example, RBC models can get right the relative variances of consumption, nvestment, capital stocks, and worker hours; and also account for the procyclical behavior of these variables. However, the models tend to overstate the procyclical patterns of hours, productivity, real interest rates, and real wage rates. In addition, to explain the standard deviation output growth, the models require a standard deviation for technological