Money, Prices, Interest Rates and the Business Cycle
AbstractThe mechanisms governing the relationship of money, prices and interest rates to the business cycle are the most studied and most disputed topics in macroeconomics. In this paper, we first document key empirical aspects of this relationship. We then ask how well three benchmark rational expectations macroeconomic models--real business cycle model, a sticky price model and a liquidity effect model--account for these central facts. While the models have diverse successes and failures, none can account for the fact that real and nominal interest rates are 'inverted leading indicators' of real economic activity. That is, none of the models captures the post-war U.S. business cycle fact that a high real or nominal interest rate in the current quarter predicts a low level of real economic activity two to four quarters in the future. Copyright 1996 by MIT Press.
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Bibliographic InfoArticle provided by MIT Press in its journal Review of Economics & Statistics.
Volume (Year): 78 (1996)
Issue (Month): 1 (February)
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Web page: http://mitpress.mit.edu/journals/
Other versions of this item:
- Robert G. King & Mark W. Watson, 1995. "Money, prices, interest rates and the business cycle," Working Paper Series, Macroeconomic Issues 95-10, Federal Reserve Bank of Chicago.
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- Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1992.
"Stochastic Trends and Economic Fluctuations,"
NBER Working Papers
2229, National Bureau of Economic Research, Inc.
- Robert S. Chirinko, 1993.
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Research Working Paper
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- Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Michael Woodford: Revolución y Evolución en la Macroeconomía del siglo XX
by Enrique Bour in Foco Económico on 2011-03-16 12:00:00
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