The Role of Monetary Shocks in the U.S. Business Cycle

Table of Contents

1 Introduction

2 Literature review

3 Data

4 Stylized Facts of U.S. Business Cycles

4.1 The Hodrick-Prescott Filter

4.2 Features of U.S. business cycles

5 Baseline Cash-in-Advance Model

5.1 The Structure

5.2 The Full Model

5.3 The Stationary State

5.4 Calibration

5.5 Impulse Responses for Cash-in-Advance Model

5.5.1 Response to a technology shock

5.5.2 Response to a money growth shock

5.6 Assessing the baseline Cash-in-Advance Model

6 Working Capital Model

6.1 The Structure

6.1.1 Households

6.1.2 Firms

6.1.3 Financial Intermediaries

6.1.4 Monetary Policy

6.2 The Optimization Problem

6.2.1 The Representative Household’s Problem

6.2.2 The Representative Firm’s Problem

6.3 The Competitive Equilibrium

6.4 The Stationary State

6.5 Impulse Responses for Working Capital Model

6.5.1 Response to a technology shock

6.5.2 Response to a money growth shock when η = 0

6.5.3 Response to a money growth shock when η = 1

6.6 Assessing the Working Capital Model when η = 0

6.7 Assessing the Working Capital Model when η = 1

7 Discussion

8 Conclusion

Research Objectives and Key Topics

This study aims to modify the basic Real Business Cycle (RBC) model to investigate the role of monetary shocks in driving cyclical fluctuations within the U.S. economy. By constructing two distinct models—one with direct lump-sum transfers and one with a banking sector—the research evaluates how the mechanism of monetary injection influences real economic variables and nominal aggregates.

• Construction of monetary business cycle models using RBC frameworks.
• Quantitative comparison of money injection channels (direct transfers vs. financial intermediaries).
• Analysis of the anticipated inflation effect versus the liquidity effect.
• Empirical evaluation of business cycle features through impulse response functions and simulation statistics.

Excerpt from the Book

Summary of Chapters

1 Introduction: Provides an overview of business cycle research, the transition from real to monetary theories, and the research objectives of this thesis.

2 Literature review: Discusses the evolution of economic thought regarding money neutrality, the anticipated inflation effect, and the development of RBC models.

3 Data: Explains the sources and measurement techniques used to align empirical U.S. quarterly data with the model variables.

4 Stylized Facts of U.S. Business Cycles: Details the use of the Hodrick-Prescott filter and establishes the core empirical characteristics of the U.S. business cycle.

5 Baseline Cash-in-Advance Model: Develops a model where money is injected via direct lump-sum transfers and examines the resulting anticipated inflation effect.

6 Working Capital Model: Introduces financial intermediaries into the framework to analyze how different channels of money injection create the liquidity effect.

7 Discussion: Synthesizes the findings and discusses the implications of different money transmission mechanisms on business cycle fluctuations.

8 Conclusion: Summarizes the study’s contributions and suggests future research directions, such as extending the model to open economies.

Keywords

Business cycle, money growth shock, monetary transmission mechanism, financial intermediaries, anticipated inflation effect, liquidity effect, real business cycle, RBC, nominal interest rate, inflation tax, neoclassical growth model, U.S. economy, Hodrick-Prescott filter, calibration, structural vector autoregression.

Frequently Asked Questions

What is the primary focus of this research?

The work focuses on constructing and testing Real Business Cycle models that incorporate money to explain economic fluctuations in the United States.

What are the central themes of the thesis?

The central themes include the modeling of money demand, the analysis of different monetary injection channels, and the role of financial intermediaries in the transmission of monetary shocks.

What is the main research question or goal?

The primary goal is to determine whether and how monetary forces, specifically money growth shocks, can explain business cycle fluctuations beyond traditional technology shocks.

Which scientific methods are employed?

The study uses neoclassical general equilibrium modeling, numerical simulation, log-linearization of non-linear models, and the Hodrick-Prescott filter for empirical data processing.

What is covered in the main section of the paper?

The main sections analyze a baseline cash-in-advance model and a working capital model, evaluating their performance against historical U.S. data through impulse responses and summary statistics.

How is this work characterized by its keywords?

The work is characterized by its focus on monetary transmission, the liquidity versus anticipated inflation effects, and the use of calibrated neoclassical models.

How does the role of the banking sector change the model outcomes?

In the working capital model, the inclusion of a banking sector allows money injections to lower borrowing costs for firms, generating a liquidity effect that stimulates economic activity, contrary to the baseline model's anticipated inflation effect.

What is the difference between the two cases (η = 0 and η = 1) analyzed in the Working Capital Model?

The cases distinguish between models where current wage income cannot be used for consumption (η = 0) and models where it can (η = 1), affecting the intra-temporal versus inter-temporal trade-offs households face when reacting to shocks.