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A Classical View of the Business Cycle

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  • Michael T. Belongia
  • Peter N. Ireland
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.

Suggested Citation

  • Michael T. Belongia & Peter N. Ireland, 2019. "A Classical View of the Business Cycle," NBER Working Papers 26056, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26056
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    1. More on the History of Distributed Lag Models
      by Dave Giles in Econometrics Beat: Dave Giles' Blog on 2016-12-28 19:41:00

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    Cited by:

    1. Belongia, Michael T. & Ireland, Peter N., 2022. "A reconsideration of money growth rules," Journal of Economic Dynamics and Control, Elsevier, vol. 135(C).
    2. Donato Masciandaro, 2023. "How Elastic and Predictable Money Should Be: Flexible Monetary Policy Rules from the Great Moderation to the New Normal Times (1993-2023)," BAFFI CAREFIN Working Papers 23196, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    3. D. Masciandaro, 2019. "What Bird Is That? Central Banking And Monetary Policy In The Last Forty Years," BAFFI CAREFIN Working Papers 19127, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    4. Donato Masciandaro & Romano Vincenzo Tarsia, 2021. "Society, Politicians, Climate Change and Central Banks: An Index of Green Activism," BAFFI CAREFIN Working Papers 21167, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    5. Belongia, Michael T. & Ireland, Peter N., 2024. "The transmission of monetary policy shocks through the markets for reserves and money," Journal of Macroeconomics, Elsevier, vol. 80(C).
    6. Peter N. Ireland, 2019. "Monetary Policy Implementation: Making Better and More Consistent Use of the Federal Reserve's Balance Sheet," Journal of Applied Corporate Finance, Morgan Stanley, vol. 31(4), pages 68-76, December.
    7. Donato Masciandaro & Romano Vincenzo Tarsia, 2021. "Society, Politicians, Climate Change and Central Banks: An Index of Green Activism," BAFFI CAREFIN Working Papers 21167, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

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    More about this item

    JEL classification:

    • B12 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Classical (includes Adam Smith)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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