An Assessment on the Monetary Business Cycle Theory

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.