Learn about the Friedman Schawarbz theory of the trade cycle and how changes in the money supply affect economic fluctuations. Explore the key principles and implications of this renowned economic theory.
Friedman Schawarbz theory of Trade cycle
Faridman and Schwarbz explained the following facts concerning the cyclical behaviour of money and related magnitudes.
- Stock of money rose during both expansion and contraction.
- The peak rate of change in money stock occurs early in the expansionary phase, and trough rate of change in money stock occurs early in recession.
- Amplitude of the changes in the rate of change in the money stock is related to the severity of cyclical movements is general business activity.
- Velocity defined as the ratio of income to money rises during expansion and the ratio of contraction.
- The partial correlation between autonomous expenditure and consumption expenditure, holding money stock constant, is roughly zero. The results suggest that for a given stock of money, there is no systematic relation, at all, between autonomous expenditure and consumption.
Fluctuations:
The influence runs from money to business and not from business to money. The appreciable changes in the rate of growth of money stock are necessary as well as a sufficient condition for appreciable changes in the rate of growth of money income and this is true both long secular changes and also for changes over periods roughly the length of business cycles.
One of the established facts concerning cyclical behaviour of money is that income velocity of money rises during expansion and falls during contraction. This fact gives rise to the related fact that fluctuations in income are wider in the relative amplitude than fluctuations in the stock of money.