The real business cycle theory can be defined as the sequences that a business goes through. It entails the rise and decline of the economic activities taking place in an economy. According to the theory, the cycle is characterized by the expansion and recession of the economy.

Some of the limitations in the real business cycle theory include the fact that theory focuses more on the supply than the demand side variables. The theory assumes that all the output produced is always at its natural level not giving room to the stickiness of prices and wages.

According to Finn Kydland and Prescott, they had a different argument concerning the real business cycle theory. To them, the variation in the development of technology had a long-run effect on the economic growth rate which has the capability of influencing the short-run fluctuation.