Endogenous Credit and Endogenous Business Cycles

M. Jarsulic

Chapter 22 in Nicholas Kaldor and Mainstream Economics, 1991, pp 395-407 from Palgrave Macmillan

Abstract: Abstract Attempts to connect monetary phenomena and business cycles often have been the province of economists who also accepted the Walrasian full employment paradigm. Monetary explanations of business cycles preceded Keynes (cf. Zarnowitz, 1985), and in the post-Keynesian era Monetarists of different varieties have also advanced them. Old style Monetarists (e.g., Poole, 1978) have tried to integrate money into a disequilibrium account of fluctuations. By assuming a demand for money proportional to nominal income, lags in price adjustment, and an exogenous money supply, they depict movements of the money supply as a main source of fluctuations. In this scheme an increase in the money supply, with prices constant, translates into an increase in real demand. This causes an increase in real output, even if markets are initially at the point of Walrasian general equilibrium. However, when perceptions catch up with reality and nominal prices adjust, so will real output. Decreases in the money supply cause fluctuations in the opposite direction. New style Monetarists reject the disequilibrium elements of this story and insist on rational expectations. The assumptions of market clearing and rational expectations are integrated into a monetary theory of cycles by introducing new assumptions about the availability of information. Lucas (1981), for example, suggests that changes in the exogenous money supply cause changes in nominal prices in ways which are only partially understood — i.e., with Friedman’s notorious ‘long and variable lags.’

Keywords: Interest Rate; Business Cycle; Central Bank; Money Supply; Rational Expectation (search for similar items in EconPapers)
Date: 1991
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DOI: 10.1007/978-1-349-10947-0_22

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