Intertemporal Substitution and the Business Cycle
This paper summarizes the theoretical role of intertemporal substitution variables in the "new classical macroeconomics." An important implication is that positive monetary shocks tend to raise expected real returns that are calculated from the usual partial information set, but tend to lower realized real returns. After reviewing previous empirical findings in the area, the study reports new results on the behavior of returns on the New York Stock Exchange and on Treasury Bills. The analysis isolates realized real rate of return effects that are significantly positive for a temporary government purchases variable and significantly negative for monetary movements. However, the results do not support the theoretical distinction between money shocks and anticipated changes in money. Since the study focuses on realized real returns, which can be measured in a straightforward manner, there is no evidence on the hypothesis that expected real returns, which are calculated on the basis of incomplete in-formation, rise with monetary disturbances. Because this proposition is sensitive to the specification of information sets, It may be infeasible to test it directly.
|Date of creation:||Jun 1980|
|Publication status:||published as Barro, Robert J. "Intertemporal substitution and the business cycle," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 14(1), pages 237-268, January 1981. Also: Barro, Robert J. and Robert G. King. "Time-Separable Preferences And Intertemporal-Substitution Models Of Business Cycles," Quarterly Journal of Economics, 1984, v99(4), 817-840.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
- Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
- Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January.
- A. S. Blinder & S. Fischer, 1978.
"Inventories, Rational Expectations, and the Business Cycle,"
220, Massachusetts Institute of Technology (MIT), Department of Economics.
- Blinder, Alan S. & Fischer, Stanley, 1981. "Inventories, rational expectations, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 277-304.
- Alan S. Blinder & Stanley Fischer, 1979. "Inventories, Rational Expectations, and the Business Cycle," NBER Working Papers 0381, National Bureau of Economic Research, Inc.
- Nelson, Charles R, 1976. "Inflation and Rates of Return on Common Stocks," Journal of Finance, American Finance Association, vol. 31(2), pages 471-483, May.
- Jaffe, Jeffrey F & Mandelker, Gershon, 1976. "The "Fisher Effect" for Risky Assets: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 31(2), pages 447-458, May.
- Fair, Ray C, 1979.
"An Analysis of the Accuracy of Four Macroeconometric Models,"
Journal of Political Economy,
University of Chicago Press, vol. 87(4), pages 701-718, August.
- Ray C. Fair, 1978. "An Analysis of the Accuracy of Four Macroeconometric Models," Cowles Foundation Discussion Papers 492, Cowles Foundation for Research in Economics, Yale University.
- Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
- Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
- McCallum, B. T., 1978. "Dating, discounting, and the robustness of the Lucas-Sargent proposition," Journal of Monetary Economics, Elsevier, vol. 4(1), pages 121-129, January.
- Thomas J. Sargent, 1973. "Rational Expectations, the Real Rate of Interest, and the Natural Rate of Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(2), pages 429-480.
- Robert E. Hall, 1979.
"Labor Supply and Aggregate Fluctuations,"
NBER Working Papers
0385, National Bureau of Economic Research, Inc.
- Hall, Robert E., 1980. "Labor supply and aggregate fluctuations," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 7-33, January.
- Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:0490. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.