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An Assessment on the Monetary Business Cycle Theory

Year 2024, Volume: 6 Issue: 1, 1 - 14, 09.02.2024
https://doi.org/10.47103/bilturk.1352232

Abstract

In recent years, considerable attention has given to analyzing the business cycle in terms of money. Many researchers have developed dynamic stochastic general equilibrium models that generate business cycle facts and guide for making monetary policy decisions. The aim of this study is to investigate how the persistence of total factor productivity (TFP) and money growth shocks drive the business cycles within an economy. To achieve this aim, we employ a monetary business cycle model with a cash-in-advance constraint, as in Cooley and Hansen (1995). Our results indicate that the volatility of macroeconomic variables is higher when the persistence of TFP shocks is greater compared to that of money growth shocks. Furthermore, TFP shocks seem to have a more significant role in driving variability within the models compared to money growth shocks. This is demonstrated by the higher percentage of variance decomposition attributed to TFP shocks, except in the case of consumption variability.

References

  • Alexopoulos, M. (2011). Read All about It! What Happens Following a Technology Shock? American Economic Review, American Economic Association, vol. 101(4), pages 1144-1179.
  • Ball, L. & Romer, D. (1990). Real Rigidities and the Non-neutrality of Money,” The Review of Economic Studies, 57(2), 183–203.
  • Bergin, P. R. (2003). Putting the New Open Economy Macroeconomics to a Test. Journal of International Economics 60, 3–34.
  • Blanchard, O., and J. Gali (2007). Real Wage Rigidities and the New Keynesian Model. Journal of Money, Credit, and Banking, supplement to vol. 39, 1, 35–66.
  • Canova, F. & Menz, T. (2011). Does Money Matter in Shaping Domestic Business Cycles? An International Investigation. Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 577-607.
  • Chari, V.V., Kehoe, P.J. & McGrattan, E.R. (1996). Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem? Federal Reserve Bank of Minneapolis, Research Department Staff Report, vol. 217.
  • Christiano, L., M. Eichenbaum, and C. Evans. (2005). Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy. Journal of Political Economy, 113(1): 1–45.
  • Cooley, T. F. & Hansen, G. D. (1989). The Inflation Tax in a Real Business Cycle Model. American Economic Review, American Economic Association, vol. 79(4), pages 733-748.
  • Cooley, T. F. & Hansen, G. D. (1998). The Role of Monetary Shocks in Equilibrium Business Cycle Theory: Three Examples. European Economic Review, Elsevier, vol. 42(3-5), pages 605-617.
  • Cooley, T.F. & Prescott, E.C. (1995). Economic Growth and Business Cycles, Cooley, T.F., editor, Frontiers of Business Cycle Research, Princeton University Press, Chapter 1.
  • Cooley, T.F. & Hansen, G.D. (1995). Money and the Business Cycle, Cooley, T.F., editor, Frontiers of Business Cycle Research, Princeton University Press, Chapter 7.
  • Cooley, T. F. & Dwyer, M. (1998). Business Cycle Analysis Without Much Theory A Look at Structural VARs. Journal of Econometrics, Elsevier, vol. 83(1-2), pages 57-88.
  • Greenwood, J., Hercowitz, Z. & Huffman, G. W. (1988). Investment, Capacity Utilization, and the Real Business Cycle. American Economic Review, American Economic Association, vol. 78(3), pages 402-417.
  • Hansen, G.D. & Wright, R. (1992). The Labor Market in Real Business Cycle Theory. Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 16(Spr), pages 2-12.
  • Jeanne, O. (1998). Generating Real Persistent Effects of Monetary Shocks: How Much Nominal Rigidity Do We Really Need? European Economic Review, Elsevier, vol. 42(6), pages 1009-1032.
  • Kydland, F. E. & Prescott, E.C. (1982). Time to Build and Aggregate Fluctuations. Econometrica, vol. 50 ( 6 ), pages 1345-70.
  • King, R.G. & Watson, W.W. (1996). Money, Prices, Interest Rates and the Business Cycle. The Review of Economics and Statistics, vol. 78, no. 1, pages 35-53.
  • Mankiw, N.G. (1989). Real Business Cycles: A New Keynesian Perspective. Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 79-90.
  • Ohanian, L. E., Stockman, A. C. and Kilian, L. (1995). The Effects of Real and Monetary Shocks in a Business Cycle Model with Some Sticky Prices. Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1209-1234.
  • Poghosyan, T. & Beidas-Strom, S. (2011). An Estimated Dynamic Stochastic General Equilibrium Model of the Jordanian Economy. IMF Working Papers. International Monetary Fund.
  • Stadler, G.W. (1994). Real Business Cycles. Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1750-1783.
  • Shea, J. (1999). What Do Technology Shocks Do?. NBER Chapters, in: NBER Macroeconomics Annual 1998, volume 13, pages 275-322, National Bureau of Economic Research, Inc.

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Year 2024, Volume: 6 Issue: 1, 1 - 14, 09.02.2024
https://doi.org/10.47103/bilturk.1352232

Abstract

References

  • Alexopoulos, M. (2011). Read All about It! What Happens Following a Technology Shock? American Economic Review, American Economic Association, vol. 101(4), pages 1144-1179.
  • Ball, L. & Romer, D. (1990). Real Rigidities and the Non-neutrality of Money,” The Review of Economic Studies, 57(2), 183–203.
  • Bergin, P. R. (2003). Putting the New Open Economy Macroeconomics to a Test. Journal of International Economics 60, 3–34.
  • Blanchard, O., and J. Gali (2007). Real Wage Rigidities and the New Keynesian Model. Journal of Money, Credit, and Banking, supplement to vol. 39, 1, 35–66.
  • Canova, F. & Menz, T. (2011). Does Money Matter in Shaping Domestic Business Cycles? An International Investigation. Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 577-607.
  • Chari, V.V., Kehoe, P.J. & McGrattan, E.R. (1996). Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem? Federal Reserve Bank of Minneapolis, Research Department Staff Report, vol. 217.
  • Christiano, L., M. Eichenbaum, and C. Evans. (2005). Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy. Journal of Political Economy, 113(1): 1–45.
  • Cooley, T. F. & Hansen, G. D. (1989). The Inflation Tax in a Real Business Cycle Model. American Economic Review, American Economic Association, vol. 79(4), pages 733-748.
  • Cooley, T. F. & Hansen, G. D. (1998). The Role of Monetary Shocks in Equilibrium Business Cycle Theory: Three Examples. European Economic Review, Elsevier, vol. 42(3-5), pages 605-617.
  • Cooley, T.F. & Prescott, E.C. (1995). Economic Growth and Business Cycles, Cooley, T.F., editor, Frontiers of Business Cycle Research, Princeton University Press, Chapter 1.
  • Cooley, T.F. & Hansen, G.D. (1995). Money and the Business Cycle, Cooley, T.F., editor, Frontiers of Business Cycle Research, Princeton University Press, Chapter 7.
  • Cooley, T. F. & Dwyer, M. (1998). Business Cycle Analysis Without Much Theory A Look at Structural VARs. Journal of Econometrics, Elsevier, vol. 83(1-2), pages 57-88.
  • Greenwood, J., Hercowitz, Z. & Huffman, G. W. (1988). Investment, Capacity Utilization, and the Real Business Cycle. American Economic Review, American Economic Association, vol. 78(3), pages 402-417.
  • Hansen, G.D. & Wright, R. (1992). The Labor Market in Real Business Cycle Theory. Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 16(Spr), pages 2-12.
  • Jeanne, O. (1998). Generating Real Persistent Effects of Monetary Shocks: How Much Nominal Rigidity Do We Really Need? European Economic Review, Elsevier, vol. 42(6), pages 1009-1032.
  • Kydland, F. E. & Prescott, E.C. (1982). Time to Build and Aggregate Fluctuations. Econometrica, vol. 50 ( 6 ), pages 1345-70.
  • King, R.G. & Watson, W.W. (1996). Money, Prices, Interest Rates and the Business Cycle. The Review of Economics and Statistics, vol. 78, no. 1, pages 35-53.
  • Mankiw, N.G. (1989). Real Business Cycles: A New Keynesian Perspective. Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 79-90.
  • Ohanian, L. E., Stockman, A. C. and Kilian, L. (1995). The Effects of Real and Monetary Shocks in a Business Cycle Model with Some Sticky Prices. Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1209-1234.
  • Poghosyan, T. & Beidas-Strom, S. (2011). An Estimated Dynamic Stochastic General Equilibrium Model of the Jordanian Economy. IMF Working Papers. International Monetary Fund.
  • Stadler, G.W. (1994). Real Business Cycles. Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1750-1783.
  • Shea, J. (1999). What Do Technology Shocks Do?. NBER Chapters, in: NBER Macroeconomics Annual 1998, volume 13, pages 275-322, National Bureau of Economic Research, Inc.
There are 22 citations in total.

Details

Primary Language English
Subjects Microeconomics (Other)
Journal Section Research Articles
Authors

Sevgi Coskun Yılmaz 0000-0002-9561-7200

Early Pub Date February 9, 2024
Publication Date February 9, 2024
Acceptance Date December 5, 2023
Published in Issue Year 2024 Volume: 6 Issue: 1

Cite

APA Coskun Yılmaz, S. (2024). An Assessment on the Monetary Business Cycle Theory. BİLTÜRK Journal of Economics and Related Studies, 6(1), 1-14. https://doi.org/10.47103/bilturk.1352232
AMA Coskun Yılmaz S. An Assessment on the Monetary Business Cycle Theory. BILTURK. February 2024;6(1):1-14. doi:10.47103/bilturk.1352232
Chicago Coskun Yılmaz, Sevgi. “An Assessment on the Monetary Business Cycle Theory”. BİLTÜRK Journal of Economics and Related Studies 6, no. 1 (February 2024): 1-14. https://doi.org/10.47103/bilturk.1352232.
EndNote Coskun Yılmaz S (February 1, 2024) An Assessment on the Monetary Business Cycle Theory. BİLTÜRK Journal of Economics and Related Studies 6 1 1–14.
IEEE S. Coskun Yılmaz, “An Assessment on the Monetary Business Cycle Theory”, BILTURK, vol. 6, no. 1, pp. 1–14, 2024, doi: 10.47103/bilturk.1352232.
ISNAD Coskun Yılmaz, Sevgi. “An Assessment on the Monetary Business Cycle Theory”. BİLTÜRK Journal of Economics and Related Studies 6/1 (February 2024), 1-14. https://doi.org/10.47103/bilturk.1352232.
JAMA Coskun Yılmaz S. An Assessment on the Monetary Business Cycle Theory. BILTURK. 2024;6:1–14.
MLA Coskun Yılmaz, Sevgi. “An Assessment on the Monetary Business Cycle Theory”. BİLTÜRK Journal of Economics and Related Studies, vol. 6, no. 1, 2024, pp. 1-14, doi:10.47103/bilturk.1352232.
Vancouver Coskun Yılmaz S. An Assessment on the Monetary Business Cycle Theory. BILTURK. 2024;6(1):1-14.

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