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Endogenous money supply and the business cycle

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Listed:
  • William T. Gavin
  • Finn E. Kydland

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.

Suggested Citation

  • William T. Gavin & Finn E. Kydland, 1997. "Endogenous money supply and the business cycle," Working Papers 1995-010, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:1995-010
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    References listed on IDEAS

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    1. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, pages 11-44.
    2. Cooley, Thomas F. & Ohanian, Lee E., 1991. "The cyclical behavior of prices," Journal of Monetary Economics, Elsevier, pages 25-60.
    3. 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.
    4. 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.
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    6. Christopher A. Sims, 1989. "Models and Their Uses," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 71(2), pages 489-494.
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    11. 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.
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    15. 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 419-433, October.
    16. 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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    More about this item

    Keywords

    Business cycles ; Money supply;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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