Estimating the Evolution of Money’s Role in the U.S. Monetary Business Cycle



This article is corrected by:

  1. Errata: Erratum Volume 44, Issue 4, 751–755, Article first published online: 22 May 2012

We are grateful to Kenneth D. West (Editor), and two anonymous referees for their comments that greatly improved to quality of the paper. We also thank Marco Airaudo, Giovanni Favara, Carlo Favero, Robert G. King, Edward Nelson, and Paolo Surico for their very detailed and insightful comments on earlier drafts, as well as Viola Angelini, Guido Ascari, Marco Del Negro, Neil Ericsson, Francesco Furlanetto, Marcus Miller, Antonio Nicolò, Elena Pesavento, Jouko Vilmunen, and participants at ESEM 2008 (Bocconi University, Milan), MMF 2008 (Birkbeck College, London), and RES 2009 (University of Surrey) for useful feedback. All remaining errors are ours. The opinions expressed in this paper do not necessarily reflect those of the Bank of Finland.


We assess money’s role in the post-WWII U.S. business cycle by employing both fixed-coefficient and rolling-window Bayesian estimations of a structural model of the business cycle with money. Our empirical evidence favors a specification with drifting parameters for money-consumption nonseparability and the Federal Reserve’s reaction to nominal money growth. The role of money is estimated to have been important during the 1970s and declined afterward. The omission of money produces severely distorted impulse response functions (relative to the model with money). Money is found to be important in replicating the U.S. output volatility during the Great Inflation.