A Classical View of the Business Cycle

In the 1920s, Irving Fisher described how variations in the price level, presumably caused by changes in the money stock, were associated with cyclical movements in output and employment. At the same time, Holbrook Working designed a rule for achieving price stability through control of the money supply. This paper develops a structural vector autoregression that allows these “classical” channels of monetary transmission to operate alongside the modern New Keynesian interest rate channel. Even with Bayesian priors favoring the New Keynesian view, the U.S. data produce posterior distributions for the model's parameters consistent with the ideas of Fisher and Working.