The Role of Monetary Shocks in Equilibrium Business Cycle Theory: Three Examples

Abstract

This paper analyzes three equilibrium business cycle models that differ according to the mechanism through which monetary growth shocks affect the economy. These include models with inflation tax effects [as in Cooley and Hansen (1989, 1995)], with staggered nominal wage contracts [as in Cho and Cooley (1995)], and with unanticipated inflation effects [as in Lucas (1975) and Cooley and Hansen (1997)]. We review the most important monetary features of business cycles in post-war U.S. data and compare these with the same features of the artificial economies. Our goal is to identify characteristics of the business cycle that each mechanism helps to explain, the features that remain puzzling, and to describe how the form of the mechanism matters.

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JEL Classification: E32, E52