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Unanticipated Money

Author

Listed:
  • 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.

Suggested Citation

  • Cooley, Thomas F. & Hansen, Gary D., 1997. "Unanticipated Money," Economics Series 42, Institute for Advanced Studies.
  • Handle: RePEc:ihs:ihsesp:42
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    File URL: http://www.ihs.ac.at/publications/eco/es-42.pdf
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    References listed on IDEAS

    as
    1. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
    2. 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.
    3. 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 733-748, September.
    4. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    5. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May.
    6. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    7. 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.
    8. 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.
    9. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
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    Citations

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    Cited by:

    1. José U. Mora Mora, 2013. "Fluctuaciones económicas bajo régimen de cambio fijo en una economía pequeña con dos sectores," REVISTA CIFE, UNIVERSIDAD SANTO TOMÁS, June.
    2. Dixon, Huw & Pourpourides, Panayiotis M., 2016. "On imperfect competition with occasionally binding cash-in-advance constraints," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 72-85.
    3. Hong, Hao, 2011. "Money, interest rates and the real activity," Cardiff Economics Working Papers E2011/18, Cardiff University, Cardiff Business School, Economics Section.
    4. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
    5. M. Hakan Berument & Nukhet Dogan & Aysit Tansel, 2009. "Macroeconomic Policy and Unemployment by Economic Activity: Evidence from Turkey," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 45(3), pages 21-34, May.
    6. 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.
    7. 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).
    8. 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.
    9. 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.
    10. 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.
    11. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Modeling money," Working Paper Series, Macroeconomic Issues WP-97-17, Federal Reserve Bank of Chicago.
    12. M. Hakan Berument & Nukhet Dogan & Aysit Tansel, 2009. "Macroeconomic Policy and Unemployment by Economic Activity: Evidence from Turkey," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 45(3), pages 21-34, May.
    13. José Ustorgio Mora Mora, 2013. "Fluctuaciones económicas en una economía pequeña con dos sectores productivos bajo régimen de cambio flotante," REVISTA ECOS DE ECONOMÍA, UNIVERSIDAD EAFIT, June.
    14. Ragan, Christopher, 1998. "On the Believable Benefits of Low Inflation," Staff Working Papers 98-15, Bank of Canada.
    15. Luo, Yulei & Young, Eric, 2013. "Rational Inattention in Macroeconomics: A Survey," MPRA Paper 54267, University Library of Munich, Germany.

    More about this item

    Keywords

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

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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