Money, Multiplier Accelerator Interaction, and the Business Cycle

Abstract

System have had the perverse effect of contributing to economic instability. Our analysis reveals that it is quite possible that the American economy would be subject to even greater instability if discretionary monetary policy were replaced by the simple rule of having the money supply expand at a constant rate per annum in both boom and recession. We first specify the behavioral equations of a model constituting a synthesis of the real theory of the business cycle provided by the multiplier-accelerator model of Samuelson [1939] with the Hicks' [1937] static IS-LM apparatus for the analysis of the role of money in the determination of aggregate income. Then we analyze the effects of alternative stabilization strategies that might be pursued by the monetary authorities. Stochastic disturbances are shown to create complications in the formulation of appropriate stabilization policy. In the concluding section we consider the implications of our analysis with regard to the debate on rules vs. discretion in the execu-

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