Money and Business Cycles: A Real Business Cycle Interpretation
Charles I. Plosser
This paper focusses on the role of money in economic fluctuations. While money may play an
important role in market economies, its role as an important impulse to business cycles remains a
highly controversial hypothesis. For years economists have attempted to construct monetary
theories of the business cycle with only limited empirical success. Alternatively, recent real
theories of the cycle have taken the view that to a first approximation independent variations in
the nominal quantity of outside money are neutral. This paper finds that the empirical evidence
for a monetary theory of the cycle is weak. Not only do variations in nominal money explain
very little of subsequent movements in real activity, but what explanatory power exists arises
from variations in endogenous components of money.
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