Working Paper: NBER ID: w0853
Authors: Robert G. King; Charles I. Plosser
Abstract: 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.
Keywords: money; credit; prices; real business cycle
JEL Codes: E32; E51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| External Monetary Measures (F33) | Real Activity (E23) |
| Internal Monetary Measures (E51) | Real Activity (E23) |
| Real Activity (E23) | Internal Monetary Measures (E51) |
| Banking Sector (G21) | Internal Monetary Measures (E51) |
| Banking Sector (G21) | Real Activity (E23) |