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Unanticipated Money Growth and the Business Cycle Reconsidered

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  • Cooley, Thomas F
  • Hansen, Gary D

Abstract

The role of unanticipated changes in money growth for aggregate fluctuations is reexamined using the methods of quantitative equilibrium business cycle theory. A stochastic growth model with money is constructed in which production and trade take place in spatially separated markets (islands). Following Robert E. Lucas (1972, 1975), individuals only observe prices in their own local market, causing them to confuse changes in the average price level with changes in market specific relative prices. The authors show that this mechanism can lead to large fluctuations in real economic activity. Some aspects of the statistical properties of these fluctuations, however, differ significantly from those describing U.S. business cycles. Copyright 1997 by Ohio State University Press.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 29 (1997)
Issue (Month): 4 (November)
Pages: 624-48

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Handle: RePEc:mcb:jmoncb:v:29:y:1997:i:4:p:624-48

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May.
  2. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September.
  3. Gary D. Hansen & Edward C. Prescott, 1992. "Recursive methods for computing equilibria of business cycle models," Discussion Paper / Institute for Empirical Macroeconomics 36, Federal Reserve Bank of Minneapolis.
  4. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  5. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  6. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  7. Finn E. Kydland, 1989. "The role of money in a business cycle model," Discussion Paper / Institute for Empirical Macroeconomics 23, Federal Reserve Bank of Minneapolis.
  8. S. Rao Aiyagari, 1994. "On the contribution of technology shocks to business cycles," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 22-34.
  9. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
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Cited by:
  1. Verónica Mies & Felipe Morandé & Matías Tapia, 2002. "Política Monetaria y Mecanismos de Transmisión: Nuevos Elementos para una Vieja Discusión," Working Papers Central Bank of Chile 181, Central Bank of Chile.
  2. Ragan, Christopher, 1998. "On the Believable Benefits of Low Inflation," Working Papers 98-15, Bank of Canada.
  3. Hakan Berument & Nukhet Dogan & Aysit Tansel, 2008. "Macroeconomic Policy and Unemployment by Economic Activity: Evidence from Turkey," Working Papers 2008/7, Turkish Economic Association.
  4. Huw Dixon & Panayiotis M. Pourpourides, 2011. "On Imperfect Competition with Occasionally Binding Cash-in-Advance Constraints," Working Papers 2011-3, Central Bank of Cyprus.
  5. Cooley, Thomas F. & Hansen, Gary D., 1998. "The role of monetary shocks in equilibrium business cycle theory: Three examples," European Economic Review, Elsevier, vol. 42(3-5), pages 605-617, May.
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Modeling Money," NBER Working Papers 6371, National Bureau of Economic Research, Inc.
  7. Hong, Hao, 2011. "Money, interest rates and the real activity," Cardiff Economics Working Papers E2011/18, Cardiff University, Cardiff Business School, Economics Section.
  8. Norrbin, Stefan, 2001. "What Have We Learned from Empirical Tests of the Monetary Transmission Effect," Working Paper Series 121, Sveriges Riksbank (Central Bank of Sweden).
  9. Christian Calmes & Frederic Dufourt, 2000. "Nominal Dynamics in Expected Market-Clearing Models," Cahiers de recherche CREFE / CREFE Working Papers 126, CREFE, Université du Québec à Montréal.
  10. Verónica Mies M. & Felipe Morandé L. & Matías Tapia G., 2002. "Monetary Policy and Transmission Mechanisms: New Elements for an old Debate," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 5(3), pages 29-66, December.
  11. Luo, Yulei & Young, Eric, 2013. "Rational Inattention in Macroeconomics: A Survey," MPRA Paper 54267, University Library of Munich, Germany.

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