This paper presents a monetarist model of the business cycle with price-setting firms. The model is estimated, and the point estimates used in simulations to illustrate the properties of the model. The real goods market is found to be stable, although subject to sharp changes in output. This model is consistent with rational expectations. Nevertheless, monetary policy can have a lasting impact, and the simulations show this to be the case. Fiscal policy too is found to influence the business cycle, but its short-run effects are substantially smaller than its impact effects. The possibility of an activist government policy in this model does not imply the efficiency of an activist policy.
- Federal Reserve Bank of Minneapolis. Research Division.
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