Monetary Regimes, Money Supply, and the US Business Cycle since 1959

Abstract

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, captures well the actual behavior of a monetary economy—the United States. 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 United States.