This paper offers a general equilibrium model that explains how the observed correlations of money and output fluctuations may come about through endogenously determined fluctuations in the money multiplier. The model is calibrated to meet long-run (including monetary) features of the U.S. economy; it is then subjected to shocks to the Solow residual following a random process similar to that observed in U.S. data.Money supply

Finn Kydland

Scott Freeman

English

Research Papers in Economics

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paper
FEDERAL RESERVE BANK OF CLEVELAND
Monetary Aggregates and Output
by Scott Freeman and Finn Kydland
9813Working Paper 9813
MONETARY AGGREGATES AND OUTPUT
by Scott Freeman and Finn Kydland
Scott Freeman is at The University of Texas at Austin, and Finn Kydland is at Carnegie Mellon University.
The authors thank Robert Dittmar and Alan Ahearne for their research assistance and also appreciate the
comments of numerous seminar participants, especially discussants Nathan Balke and Peter Ireland.
 Working papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate
discussion and critical comment on research in progress. They may not have been subject to the formal
editorial review accorded official Federal Reserve Bank of Cleveland publications.
The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank
of Cleveland or of the Board of Governors of the Federal Reserve System.
Working papers are now available electronically through the Cleveland Fed’s home page on the World
Wide Web:  http://www.clev.frb.org.
September 1998Monetary Aggregates and Output
by Scott Freeman and Finn Kydland
This paper offers a general equilibrium model that explains how the observed correlations of money and
output fluctuations may come about through endogenously determined fluctuations in the money multiplier.
The model is calibrated to meet long run features of the U.S. economy (including monetary features) and
then subjected to shocks to the Solow residual following a random process like that observed in U.S. data.
The model’s predicted business-cycle frequency correlations, of both real and nominal variables, share the
following features with U.S. data:  i) M1 is positively correlated with real output; ii) the money multiplier
and deposit-to-currency ratio are positively correlated with real output; iii) the price level is negatively
correlated with output [in spite of (i) and (ii)]; iv) the correlation of M1 with contemporaneous prices is
substantially weaker than the correlation of M1 with real output; v) correlations among real variables are
essentially unchanged under different monetary policy regimes; and vi) real money balances are smoother
than money demand equations would predict.  Although features (i) and (iv) may have been considered
support for a causal influence of money on output, the paper demonstrates that they are consistent with an
economy in which money has no such causal influence.

Monetary aggregates and output

http://www.clevelandfed.org/research/workpaper/1998/Wp9813.pdf

Monetary aggregates and output

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