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Unanticipated Money

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Author Info

  • Cooley, Thomas F.

    (Department of Economics, University of Rochester)

  • Hansen, Gary D.

    (Department of Economics, University of California, Los Angeles)

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 that has the feature, following Lucas (1972, 1975), that production and trade take place in spatially separated markets (islands). Individuals must infer changes in the aggregate price level from observing local relative prices. This causes individuals to react to changes in the average price level, due to unanticipated changes in the aggregate money supply, as though they were changes in market specific relative prices. We show that this mechanism can lead to quantitatively large fluctuations in real economic activity. The statistical properties of these fluctuations, however, are quite different from the properties of fluctuations observed in the U.S. economy.

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File URL: http://www.ihs.ac.at/publications/eco/es-42.pdf
File Function: First version, 1997
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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 42.

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Length: 27 pages
Date of creation: Mar 1997
Date of revision:
Handle: RePEc:ihs:ihsesp:42

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Related research

Keywords: Business Cycles; Monetary Policy; Aggregate Fluctuations; Real Business Cycles;

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References

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  1. 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.
  2. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  3. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  4. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  5. Robert E. Lucas Jr. & Nancy L. Stokey, 1984. "Money and Interest in Cash-In-Advance Economy," Discussion Papers 628, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  7. 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.
  8. 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.
  9. 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.
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Cited by:
  1. Berument, Hakan & Dogan, Nukhet & Tansel, Aysit, 2008. "Macroeconomic Policy and Unemployment by Economic Activity: Evidence from Turkey," IZA Discussion Papers 3461, Institute for the Study of Labor (IZA).
  2. 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.
  3. Luo, Yulei & Young, Eric, 2013. "Rational Inattention in Macroeconomics: A Survey," MPRA Paper 54267, University Library of Munich, Germany.
  4. 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.
  5. Dixon, Huw & Pourpourides, Panayiotis M., 2012. "On Imperfect Competition with Occasionally Binding Cash-in-Advance Constraints," Cardiff Economics Working Papers E2012/3, Cardiff University, Cardiff Business School, Economics Section.
  6. 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.
  7. Ragan, Christopher, 1998. "On the Believable Benefits of Low Inflation," Working Papers 98-15, Bank of Canada.
  8. 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.
  9. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Modeling money," Working Paper Series, Macroeconomic Issues WP-97-17, Federal Reserve Bank of Chicago.
  10. Hong, Hao, 2011. "Money, interest rates and the real activity," Cardiff Economics Working Papers E2011/18, Cardiff University, Cardiff Business School, Economics Section.
  11. 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).

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