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Published online by Cambridge University Press:  20 April 2021

Hylton Hollander*
Stellenbosch University
Lars Christensen
Stellenbosch University
Address correspondence to: Department of Economics, Stellenbosch University, Stellenbosch, 7602, South Africa. e-mail:
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The monetary authority’s choice of operating procedure has significant implications for the role of monetary aggregates and interest rate policy on the business cycle. Using a dynamic general equilibrium model, we show that the type of endogenous monetary regime, together with the interaction between money supply and demand, does well to capture the actual behavior of a monetary economy—the USA. The results suggest that the evolution toward a stricter interest rate-targeting regime renders central bank balance sheet expansions ineffective. In the context of the 2007–2009 Great Recession, a more flexible interest rate-targeting regime would have led to a significant monetary expansion and more rapid economic recovery in the USA.

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© Cambridge University Press 2021


We thank two anonymous referees, Apostolos Serletis, and participants at the Society for Economic Measurement conference in Frankfurt in August 2019 for very helpful comments. We extend our gratitude to two anonymous referees for the Mercatus working paper series whose comments contributed to the significant improvement of this paper. We would like to particularly thank Bill Barnett, Jonathan Benchimol, Stan du Plessis, Johan Fourie, Bob Hetzel, Tracy Miller, and Dawie van Lill for their comments and advice. We would also like to acknowledge the valuable feedback from participants at the 49th and 50th Money, Macro and Finance Annual Conferences (held at Heriot-Watt University and King’s College London, respectively), the Economic Society of South Africa Biennial Conference, and research seminars at the University of Cape Town and Stellenbosch University.


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