The Role of Monetary Shocks in the U.S Business Cycle
Date
2013
Authors
Ziaul Haque, Qazi
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Thesis
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Abstract
ABSTRACT
The purpose of this study is to illustrate how the basic Real Business Cycle (RBC) model
can be modified to incorporate money in an attempt to construct monetary business cycle
models of the U.S. economy. This is done for one case where money enters the model
as direct lump-sum transfers to households and for the other case where money injections
enter the economy through the financial system. Interestingly, the two channels generate
very different responses to a money growth shock. In the first case, a positive money
growth shock increases nominal interest rates and depresses economic activity, which is
called the anticipated inflation effect. However, the popular consensus among economists
is that nominal interest rates fall after a positive monetary shock. This motivates the
construction of our second model where it is conjectured that the banking sector plays an
important role in the monetary transmission mechanism and money is injected into the
model through financial intermediaries. It is observed in this model that a positive monetary
shock reduces interest rates and stimulates economic activity, which is called the
liquidity effect. Furthermore, the statistics generated by the models show that monetary
shocks have no effect on real variables when money enters as direct lump-sum transfers
to households. On the contrary, such shocks have significant real impact when money
enters through the financial system. Taken together, this implies that how money enters
into the model significantly matters for the impact of monetary shocks and such shocks
entering through financial intermediaries may be important in determining the cyclical fluctuations of the U.S. economy.
School/Discipline
School of Economics
Dissertation Note
Thesis (B.Ec.(Hons)) -- University of Adelaide, School of Economics, 2017
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