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Endogenous Money Supply and the Business Cycle

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  • William T. Gavin

    (Research Department, Federal Reserve Bank of St. Louis)

  • Finn E. Kydland

    (Graduate School of Industrial Administration, Carnegie Mellon University)

Abstract

This paper documents changes in the cyclical behavior of nominal data series that appear after 1979:Q3 when the Federal Reserve implemented a policy to lower the inflation rate. Such changes were not apparent in real variables. A business cycle model with impulses to technology and a role for money is used to show how alternative money supply rules are expected to affect observed business cycle facts. In this model, changes in the money supply rules have almost no effect on the cyclical behavior of real variables, yet have a significant impact on the cyclically nature of nominal variables. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.1998.0055
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 2 (1999)
Issue (Month): 2 (April)
Pages: 347-369

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Handle: RePEc:red:issued:v:2:y:1999:i:2:p:347-369

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Keywords: business cycle facts; endogenous monetary policy; real business cycles;

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References

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  1. Backus, David K & Kehoe, Patrick J, 1992. "International Evidence of the Historical Properties of Business Cycles," American Economic Review, American Economic Association, American Economic Association, vol. 82(4), pages 864-88, September.
  2. Christopher A. Sims, 1989. "Models and their uses," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 11, Federal Reserve Bank of Minneapolis.
  3. Gilbert Ghez & Gary S. Becker, 1975. "The Allocation of Time and Goods over the Life Cycle," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number ghez75-1.
  4. Michael R. Pakko, 1997. "The cyclical relationship between output and prices: an analysis in the frequency domain," Working Papers, Federal Reserve Bank of St. Louis 1997-007, Federal Reserve Bank of St. Louis.
  5. Cooley, T.F. & Ohanian, L.E., 1989. "The Cyclical Behavior Of Prices," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 188, University of Rochester - Center for Economic Research (RCER).
  6. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 25(1), pages 11-44, January.
  7. Mulligan, Casey B & Sala-I-Martin, Xavier X, 1997. "The Optimum Quantity of Money: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(4), pages 687-715, November.
  8. Finn E. Kydland & Edward C. Prescott, 1990. "Business cycles: real facts and a monetary myth," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-18.
  9. Bryan, Michael F. & Gavin, William T., 1994. "A different kind of money illusion: The case of long and variable lags," Journal of Policy Modeling, Elsevier, Elsevier, vol. 16(5), pages 529-540, October.
  10. Gary D. Hansen & Edward C. Prescott, 1992. "Recursive methods for computing equilibria of business cycle models," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 36, Federal Reserve Bank of Minneapolis.
  11. Arthur J. Rolnick & Warren E. Weber, 1994. "Inflation, money, and output under alternative monetary standards," Staff Report, Federal Reserve Bank of Minneapolis 175, Federal Reserve Bank of Minneapolis.
  12. Smith, R Todd, 1992. "The Cyclical Behavior of Prices," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 24(4), pages 413-30, November.
  13. Robert E. Lucas, Jr., 1994. "On the welfare cost of inflation," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 94-07, Federal Reserve Bank of San Francisco.
  14. Finn E. Kydland, 1989. "The role of money in a business cycle model," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 23, Federal Reserve Bank of Minneapolis.
  15. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 472-92, June.
  16. Salemi, Michael K, 1995. "Revealed Preference of the Federal Reserve: Using Inverse-Control Theory to Interpret the Policy Equation of a Vector Autoregression," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 13(4), pages 419-33, October.
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