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MONETARY REGIMES, MONEY SUPPLY, AND THE USA BUSINESS CYCLE SINCE 1959: IMPLICATIONS FOR MONETARY POLICY TODAY

Published online by Cambridge University Press:  20 April 2021

Hylton Hollander  and
Lars Christensen
Hylton Hollander*
Affiliation:
Stellenbosch University
Lars Christensen
Affiliation:
Stellenbosch University
*
Address correspondence to: Department of Economics, Stellenbosch University, Stellenbosch, 7602, South Africa. e-mail: hylton@sun.ac.za.
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Abstract

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The monetary authority’s choice of operating procedure has significant implications for the role of monetary aggregates and interest rate policy on the business cycle. Using a dynamic general equilibrium model, we show that the type of endogenous monetary regime, together with the interaction between money supply and demand, does well to capture the actual behavior of a monetary economy—the USA. The results suggest that the evolution toward a stricter interest rate-targeting regime renders central bank balance sheet expansions ineffective. In the context of the 2007–2009 Great Recession, a more flexible interest rate-targeting regime would have led to a significant monetary expansion and more rapid economic recovery in the USA.

Keywords

Monetary RegimesMonetary PolicyMoney DemandUSA Business Cycle
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 7 , October 2022 , pp. 1806 - 1832
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© Cambridge University Press 2021

Footnotes

We thank two anonymous referees, Apostolos Serletis, and participants at the Society for Economic Measurement conference in Frankfurt in August 2019 for very helpful comments. We extend our gratitude to two anonymous referees for the Mercatus working paper series whose comments contributed to the significant improvement of this paper. We would like to particularly thank Bill Barnett, Jonathan Benchimol, Stan du Plessis, Johan Fourie, Bob Hetzel, Tracy Miller, and Dawie van Lill for their comments and advice. We would also like to acknowledge the valuable feedback from participants at the 49th and 50th Money, Macro and Finance Annual Conferences (held at Heriot-Watt University and King’s College London, respectively), the Economic Society of South Africa Biennial Conference, and research seminars at the University of Cape Town and Stellenbosch University.

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