This paper analyzes the interaction of money and the price level with a business cycle that is fully real in origin, adopting a view which differs sharply from traditional theories that assign a significant causal influence to monetary movements. The theoretical analysis focuses on a banking system that produces transaction. services on demand and thus reflects market activity. Under one regime of bank regulation and fiat money supply by the monetary authority, the real business cycle theory predicts that (i)movements in external monetary measures should be uncorrelated with real activity and(ii) movements in internal monetary measures should be positively correlated with real activity. Preliminary empirical analysis provides general support for this focus on the banking sector since much of the correlation between monetary measures and real activity is apparently with inside money.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
0853.
Length: Date of creation: Nov 1984 Date of revision: Handle: RePEc:nbr:nberwo:0853
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