Intertemporal Substitution and the Business Cycle / Robert J. Barro.

By:

Barro, Robert J

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w0490.Publication details: Cambridge, Mass. National Bureau of Economic Research 1980.Description: 1 online resource: illustrations (black and white)Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: This paper summarizes the theoretical role of intertemporal substitution variables in the "new classical macroeconomics." An important implication is that positive monetary shocks tend to raise expected real returns that are calculated from the usual partial information set, but tend to lower realized real returns. After reviewing previous empirical findings in the area, the study reports new results on the behavior of returns on the New York Stock Exchange and on Treasury Bills. The analysis isolates realized real rate of return effects that are significantly positive for a temporary government purchases variable and significantly negative for monetary movements. However, the results do not support the theoretical distinction between money shocks and anticipated changes in money. Since the study focuses on realized real returns, which can be measured in a straightforward manner, there is no evidence on the hypothesis that expected real returns, which are calculated on the basis of incomplete in-formation, rise with monetary disturbances. Because this proposition is sensitive to the specification of information sets, It may be infeasible to test it directly.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w0490 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w0487 Income Tax Incentives to Promote Saving /	nber w0488 The Level and Distribution of Economic Well-Being /	nber w0489 Martingale-Like Behavior of Prices /	nber w0490 Intertemporal Substitution and the Business Cycle /	nber w0491 Components of Manufacturing Inventories /	nber w0492 Exchange-Rate Unions and the Volatility of the Dollar /	nber w0493 Exchange Rate Risk and the Macroeconomics of Exchange Rate Determination /	Next

June 1980.

This paper summarizes the theoretical role of intertemporal substitution variables in the "new classical macroeconomics." An important implication is that positive monetary shocks tend to raise expected real returns that are calculated from the usual partial information set, but tend to lower realized real returns. After reviewing previous empirical findings in the area, the study reports new results on the behavior of returns on the New York Stock Exchange and on Treasury Bills. The analysis isolates realized real rate of return effects that are significantly positive for a temporary government purchases variable and significantly negative for monetary movements. However, the results do not support the theoretical distinction between money shocks and anticipated changes in money. Since the study focuses on realized real returns, which can be measured in a straightforward manner, there is no evidence on the hypothesis that expected real returns, which are calculated on the basis of incomplete in-formation, rise with monetary disturbances. Because this proposition is sensitive to the specification of information sets, It may be infeasible to test it directly.