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Money, Credit and Interest Rates in the Business Cycle

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  • Benjamin M. Friedman
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    Abstract

    Fluctuations of business activity in the United States clearly have their monetary and financial side, but these aspects of U.S. economic fluctuations exhibit few quantitative regularities that have persisted unchanged across spans of tine over which the nation's financial markets have themselves undergone significant change. The evidence on monetary and financial aspects of U.S. business cycles assembled in this paper shows major differences among the pre WorldWar I, inter-war, and post World War II periods, and between the first and second halves of the post-war period. Evidence suggesting changes fromone period to another repeatedly emerges, regardless of whether the method of analysis is simple or sophisticated, regardless of whether the underlying data are annual or quarterly, and regardless of whether the relationships under study are bivariate or multivariate. Moreover, the differences between one period and another are significant not just statistically but also economically, in the sense of major differences in the magnitude and timing of cyclical movements.The paper's main message, therefore, is a warning against accepting too readily - either as a matter of positive economics or for policy purposes -the appearance of simple and eternal verities in much of the existing literature of monetary and financial aspects of business fluctuations. More complicated models involving many variables and/or nonlinear relationships may have remained stable, but the evidence clearly shows that simple linear relationships among only a few such variables have not.

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    File URL: http://www.nber.org/papers/w1482.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1482.

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    Date of creation: Dec 1986
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    Handle: RePEc:nbr:nberwo:1482

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    Cited by:
    1. Elyès Jouini & Clotilde Napp, 2010. "Unbiased Disagreement in Financial Markets, Waves of Pessimism and the Risk-Return Trade-off," Review of Finance, European Finance Association, vol. 15(3), pages 575-601.
    2. Stanley C. W. Salvary, 2004. "Observations On The Transmission Of Business Fluctuations: The Case Of Latin America 1972-1989," Macroeconomics 0411014, EconWPA.
    3. Marvin J. Barth III & Valerie A. Ramey, 2000. "The Cost Channel of Monetary Transmission," NBER Working Papers 7675, National Bureau of Economic Research, Inc.
    4. Asea, Patrick K. & Blomberg, Brock, 1998. "Lending cycles," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 89-128.
    5. Benjamin M. Friedman, 1989. "Lessons On Monetary Policy From The 1980's," NBER Working Papers 2551, National Bureau of Economic Research, Inc.
    6. Dibeh, Ghassan, 2006. "Target zone dynamics where the fundamental follows a SDE with periodic forcing," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 363(2), pages 437-445.

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