Lecture 26 Money in the classical model

Lecture 26 Money in - Eco320L Spring 2010 Professor Beatrix Paal Lecture 26 Money in the classical model updated 9:55 AM 1 Lecture 26 Money in the

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Eco320L Spring 2010, Professor Beatrix Paal updated 10/25/2010 9:55 AM Lecture 26: Money in the classical model 1 Lecture 26 Money in the classical model Last time unemployment ( Chapter 3.5 and 10.1 ) Today money in the classical model ( Chapters 10.2 and 10.3 ) Next time read Chapters 11.1 and 11.2 for background on your own monetary and fiscal policy in the Keynesian model ( Chapter 11.3 ) Keynesian business cycle and stabilization theory ( Chapter 11.4 ) 1 Money in the classical model basic prediction of the model monetary neutrality data M2 is procyclical and leading possible interpretations 1. money is not neutral: monetary shocks can cause business cycles 2. reverse causation ”: expected future increase in output cause current money supply to increase 2
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Eco320L Spring 2010, Professor Beatrix Paal updated 10/25/2010 9:55 AM Lecture 26: Money in the classical model 2 Reverse causation mechanism 1 expected future increase in output causes current money demand to increase: firms prepare for higher production by hiring workers, buying inputs etc. Fed accommodates higher money demand by increasing money supply why? does not want the price level to fall mechanism 2 part of M2 most correlated with output is deposits M0 is not correlated with output very much, and is not leading money output correlation is caused by the response of the banking system to expected future output increases firms prepare for the higher future production by investing more: they need to borrow from banks, so banks need to attract more deposits 3 Evidence on money and output M2 is procyclical and leading Should M2 and Y correlation be interpreted as causation? Friedman and Schwartz (1963)
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This note was uploaded on 10/25/2010 for the course ECO 320L taught by Professor Kendrick during the Fall '10 term at University of Texas at Austin.

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Lecture 26 Money in - Eco320L Spring 2010 Professor Beatrix Paal Lecture 26 Money in the classical model updated 9:55 AM 1 Lecture 26 Money in the

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