The Role of Stochastic Shocks in the Business Cycle

Abstract

It is an accomplished fact in current growth theories that stochastic shocks do not essentially affect the long-term economic development. But ever since the remarkable paper of the Russian mathematician Eugen Slutsky from the year 1927 was translated and published in English in a completed form (Slutsky, 1937), the economists have been fascinated by the idea that the business cycles may be produced in the way discussed by Slutsky in his analysis of the Gaussian distribution. He showed that random series are capable of forming cyclic phenomena. This follows already from the symmetry of the Gaussian curve around the mean of the series, but he also showed that the effect can be made more visible by summations over certain sequences in a random series. These discoveries became generally known much later.