Endogenous money supply and the business cycle

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Endogenous money supply and the business cycle

Author Info

William T. Gavin
Finn E. Kydland

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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 cyclical nature of nominal variables. Computational experiments with alternative policy rules suggest that the change in monetary policy in 1979 may account for the sort of instability observed in the U.S. data.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1995-010.

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Date of creation: 1997
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Publication status: Published in Review of Economic Dynamics, April 1999, 2(2), pp. 347-369
Handle: RePEc:fip:fedlwp:1995-010

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Article
- William T. Gavin & Finn E. Kydland, 1999. "Endogenous Money Supply and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 347-369, April. [Downloadable!] (restricted)
Paper
- William T. Gavin & Finn E. Kydland, 1996. "Endogenous money supply and the business cycle," Working Paper 9605, Federal Reserve Bank of Cleveland. [Downloadable!]

References listed on IDEAS
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Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22. [Downloadable!]
Other versions:
- Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Staff Report 102, Federal Reserve Bank of Minneapolis. [Downloadable!]
- Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January. [Downloadable!] (restricted)
Arthur J. Rolnick & Warren E. Weber, 1994. "Inflation, money, and output under alternative monetary standards," Staff Report 175, Federal Reserve Bank of Minneapolis. [Downloadable!]
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Other versions:
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Other versions:
- David K. Backus & Patrick J. Kehoe, 1991. "International evidence on the historical properties of business cycles," Staff Report 145, Federal Reserve Bank of Minneapolis. [Downloadable!]
- Backus, David K & Kehoe, Patrick J, 1992. "International Evidence of the Historical Properties of Business Cycles," American Economic Review, American Economic Association, vol. 82(4), pages 864-88, September. [Downloadable!] (restricted)
Christopher A. Sims, 1989. "Models and their uses," Discussion Paper / Institute for Empirical Macroeconomics 11, Federal Reserve Bank of Minneapolis. [Downloadable!]
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, vol. 29(4), pages 687-715, November.
Other versions:
- Casey B. Mulligan & Xavier X. Sala-i-Martin, 1997. "The Optimum Quantity of Money: Theory and Evidence," NBER Working Papers 5954, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Casey B. Mulligan & Xavier Sala-i-Martin, 1997. "The Optimum Quantity of Money: Theory and Evidence," Economics Working Papers 229, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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Michael R. Pakko, 1997. "The cyclical relationship between output and prices: an analysis in the frequency domain," Working Papers 1997-007, Federal Reserve Bank of St. Louis. [Downloadable!]
Other versions:
- Pakko, Michael R, 2000. "The Cyclical Relationship between Output and Prices: An Analysis in the Frequency Domain," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 382-99, August.
Finn E. Kydland & Edward C. Prescott, 1990. "Business cycles: real facts and a monetary myth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-18. [Downloadable!]
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, vol. 16(5), pages 529-540, October. [Downloadable!] (restricted)
Other versions:
- Michael F. Bryan & William T. Gavin, 1991. "A different kind of money illusion: the case of long and variable lags," Working Paper 9122, Federal Reserve Bank of Cleveland. [Downloadable!]
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, vol. 13(4), pages 419-33, October.
Cooley, Thomas F. & Ohanian, Lee E., 1991. "The cyclical behavior of prices," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 25-60, August. [Downloadable!] (restricted)
Other versions:
- Cooley, T.F. & Ohanian, L.E., 1989. "The Cyclical Behavior Of Prices," RCER Working Papers 188, University of Rochester - Center for Economic Research (RCER).
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Robert E. Lucas, Jr., 1994. "On the welfare cost of inflation," Working Papers in Applied Economic Theory 94-07, Federal Reserve Bank of San Francisco.
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