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Business cycles and monetary regimes in the U.S. (1960 – 2014): A plea for monetary stability

Author

Listed:
  • Cendejas Bueno, José Luis

    (Instituto de Investigaciones Económicas y Sociales Francisco de Vitoria)

  • Castañeda, Juan Enrique

    (Economics and International Studies Department. University of Buckingham.)

  • Muñoz, Félix

    (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)

Abstract

It is still highly debated whether the Fed took sufficiently into account the rapid increase in both financial and real asset prices as well as money growth in the framing of monetary policy decisions in the years prior to the outbreak of the Global Financial Crisis; something similar occurred in the 1970s as regard the slow and insufficient response of the Fed to the growth of CPI prices. In our view, these two episodes are prime examples of how the absence of a more comprehensive monetary strategy has resulted in a case-by-case decision-making policy by the Fed lacking in consistency and effectiveness over the long term. In this respect, two elements of the central bank strategy become key: the choice of the information set the monetary authorities process and use to make policy decisions and the (main) economic model used to process that information. In this paper we consider a wide range of indicators to identify the dynamics and interaction between several output and price indicators (broadly defined to include CPI, industrial and asset prices) along the business cycle. In particular, we adopt unobserved component models to estimate and analyse the cyclical common factors of output measures, inflation and asset prices, interest rates (both short and longer term), and narrow and broad money growth measures, since 1960 to 2014 in the US. Once estimated, we analyse the correlations between these common factors and their changes in order to identify common behavioural patterns amongst them along the cycle. This analysis will result in a ‘core information set’ for the Fed suitable to frame and possibly implement a more stable monetary policy throughout the business cycle.

Suggested Citation

  • Cendejas Bueno, José Luis & Castañeda, Juan Enrique & Muñoz, Félix, 2015. "Business cycles and monetary regimes in the U.S. (1960 – 2014): A plea for monetary stability," Working Papers in Economic Theory 2015/05, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
    • Handle: RePEc:uam:wpaper:201505
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    More about this item

    Keywords

    US business cycle; US monetary policy regimes; Central Bank strategy; Money; Inflation; Cyclical common factors; Core information set.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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