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A real business cycle model with money as a sunspot variable

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  • Wilson, Matthew S.

Abstract

A well-known criticism of the RBC model is that it cannot match the data on money. Due to the perfect flexibility of prices and the absence of frictions, any exogenous increase in the money supply will be fully offset by wage and price increases, implying that money is neutral even in the short run. However, beliefs that money is non-neutral could become a self-fulfilling prophesy. By using money as a sunspot variable in an RBC model, I successfully replicate many of the correlations in the data, even though money does not directly affect the economy’s fundamentals. This shows that models with flexible prices are not necessarily incompatible with the monetary data and offers support for the use of sunspot variables in macroeconomics.

Suggested Citation

  • Wilson, Matthew S., 2020. "A real business cycle model with money as a sunspot variable," Journal of Economics and Business, Elsevier, vol. 109(C).
    • Handle: RePEc:eee:jebusi:v:109:y:2020:i:c:s0148619519301328
    DOI: 10.1016/j.jeconbus.2020.105891
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    More about this item

    Keywords

    Sunspots; Indeterminacy; RBC; Money; Increasing returns;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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