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The Behavior of Money, Credit, and Prices in a Real Business Cycle

  • Robert G. King
  • Charles I. Plosser

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.

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Date of creation: Feb 1982
Date of revision:
Publication status: published as King, Robert G. and Charles I. Plosser. "Money, Credit, and Prices in a Real Business Cycle." The American Economic Review, Vol. 74, No. 3, (June 1984), pp. 363-380.
Handle: RePEc:nbr:nberwo:0853
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  1. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  2. King, Robert G., 1981. "Monetary information and monetary neutrality," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 195-206.
  3. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  4. Azariadis, Costas, 1978. "Escalator clauses and the allocation of cyclical risks," Journal of Economic Theory, Elsevier, vol. 18(1), pages 119-155, June.
  5. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
  6. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-90, February.
  7. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
  8. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  9. Fischer, Stanley, 1974. "Money and the Production Function," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 517-33, December.
  10. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
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