Unanticipated Money Growth and the Business Cycle

Posted: 6 Jan 1997

See all articles by Thomas F. Cooley

Thomas F. Cooley

New York University - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Gary D. Hansen

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: Undated

Abstract

The role of unanticipated changes in money growth for aggregate fluctuations is re-examined 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.

JEL Classification: E32, E50

Suggested Citation

Cooley, Thomas F. and Hansen, Gary D., Unanticipated Money Growth and the Business Cycle (Undated). Available at SSRN: https://ssrn.com/abstract=3623

Thomas F. Cooley

New York University - Leonard N. Stern School of Business ( email )

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Gary D. Hansen (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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