A Classical View of the Business Cycle

Michael Belongia and Peter Ireland

No 26056, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In the 1920s, Irving Fisher extended his previous work on the Quantity Theory to describe, through an early version of the Phillips Curve, how changes in the money stock could be associated with cyclical movements in output, employment, and inflation. At the same time, Holbrook Working designed a quantitative rule for achieving price stability through control of the money supply. This paper develops a structural vector autoregressive time series model that allows these "classical" channels of monetary transmission to operate alongside the now-more-familiar interest rate channel of the New Keynesian model. Even with Bayesian priors that intentionally favor the New Keynesian view, the United States data produce posterior distributions for the model's key parameters that are consistent with the ideas of Fisher and Working. Changes in real money balances enter importantly into the model's aggregate demand relationship, while growth in Divisia M2 appears in the estimated monetary policy rule. Contractionary monetary policy shocks reveal themselves through persistent declines in nominal money growth instead of rising nominal interest rates and account for important historical movements in output and inflation.

JEL-codes: B12 E31 E32 E41 E43 E52 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-cba, nep-his, nep-mac and nep-mon
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published as Michael T. Belongia & Peter N. Ireland, 2021. "A Classical View of the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(2-3), pages 333-366, March.

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Related works:
Journal Article: A Classical View of the Business Cycle (2021)
Working Paper: A Classical View of the Business Cycle (2016)
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