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Working Paper

Endogenous Money Supply and the Business Cycle

This paper documents changes in the cyclical behavior of nominal data series that appear after 1979:IIIQ, when the Federal Reserve implemented a policy to end the acceleration of inflation. 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

Gavin, William T., and Finn Kydland. 1996. “Endogenous Money Supply and the Business Cycle.” Federal Reserve Bank of Cleveland, Working Paper No. 96-05.