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Money and credit - Ivanov V.M.

8.2. Money and business cycle

Classical quantitative theory focuses on long time intervals, given that the real volume of production is determined by such long-term factors as population and production capacity. Of course, the economists of the classical school were well aware that the real volume of production did not remain constant over short-term time intervals, and recognized that the pace of economic growth accelerated and decelerated in accordance with some irregular pattern known as the business cycle. However, only in the 30s of XX century. a new generation of economists has concentrated their analytical abilities on researching the economy for short-term time intervals.

A typical business cycle has four phases of development. During the compression phase, the actual output falls. Compression lasting more than six months is called a recession. After an average of 18 months, the cycle reaches a low point called the bottom. In the expansion phase, which lasts an average of 33 months, economic growth is increasing. And finally, the cycle reaches a peak, after which the compression phase begins a new cycle (Fig. 12).

Business cycle form

Fig. 12 Business Cycle Form

Probably the most serious work exploring the role of money and money circulation in the business cycle is the work of M. Friedman and A. Schwartz, "The History of Money Circulation in the USA, 1867-1960." Scientists have discovered a pattern according to which the growth rates of the money supply in circulation change according to the cyclic scheme, anticipating the general trends in the development of the business cycle. The scheme for increasing the money supply in circulation determines the further development of the business cycle and states that the amount of money in circulation reaches a peak and begins to fall to the highest point of the business cycle. Similarly, the amount of money in circulation reaches its lowest point and begins to increase until the moment when the business cycle reaches the bottom. From fig. 13 and 14 shows that this scheme is valid for both expressive and sluggish business cycles for the period from 1908 to 1961 based on the available monthly data.

M. Fridman and A. Schwartz established the relationship of money and business cycles, and it is most closely associated with replacing the real volume of production with nominal GNP. Within one

Three cycles of extensive depression

business cycle, the relationship between money supply and the absolute level of prices is not as close as when considering the long-term time intervals, which focused on the representatives of the classical quantitative theory of money and prices. On the contrary, events within the same business cycle can be described as follows: the beginning of the change in the growth rate of the money supply in circulation, after some delay, usually amounting to several months, causes a change in the growth rate of the nominal GNP. First, a significant part of the change in nominal GNP reflects changes in real GNP, i.e., changes in the real quantity of goods and services produced in the economic system under consideration. After the delay, an increasingly significant part of the changes in the nominal GNP, as it turns out, is a change in the absolute price level. Ultimately, prices absorb an increasing part of the impact on the economy due to changes in the money supply growth rate.

If the growth rate of the money supply in circulation is slowing down, then the corresponding reactions of the nominal and real GNP, as well as the absolute price level, will change places. A lower growth rate of nominal GNP will first affect the real volume of production, and then, with some delay, the rate of change in the absolute price level.