The empirical relations between the nominal money stock and output implied by two classes of equilibrium rational expecations business cycle models are examined. The two classes are the monetary business cycle (MBC) model, which relies on monetary shocks as the source of business cycles, and the real business cycle (RBC) model, which relies on real shocks The neutrality of monetary policy in the MBC model is a debated issue in the literature. It is demonstrated, however, that the MBC model implies that observed movements in money should be uncorrelated with output regardless of the neutrality issue. This result implies that the existing empirical studies that find a significant relation between observed money and output conclusively reject the MBC model Money and output are correlated in the RBC model because of the endogenous response of money to current and expected future real shocks that, in turn, are the fundamental causes of output fluctuations. The untested hypothesis of the RBC model is that money and output are uncorrelated once the effects of current and expected future real shocks have been controlled. Use of a vector of measurable real shocks and the rational expectations assumption allows tests of this hypothesis to be designed. Execution of these tests reveals that the vector of measurable real shocks can explain the majority of postwar U.S. output variation. However, money remains significant in explaining output variation after controlling for current and expected future real shocks. Therefore, the RBC model is also rejected as an explanation for the correlation between money and output / acase@tulane.edu
| Identifer | oai:union.ndltd.org:TULANE/oai:http://digitallibrary.tulane.edu/:tulane_23268 |
| Date | January 1986 |
| Contributors | Mills, Leonard Orion (Author) |
| Publisher | Tulane University |
| Source Sets | Tulane University |
| Language | English |
| Detected Language | English |
| Rights | Access requires a license to the Dissertations and Theses (ProQuest) database., Copyright is in accordance with U.S. Copyright law |
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