Money and Monetary Policy in Dynamic Stochastic General Equilibrium Models

Arnab Bhattacharjee, Christoph Thoenissen

    Research output: Contribution to conferencePaper

    5 Citations (Scopus)
    60 Downloads (Pure)

    Abstract

    We compare three methods of motivating money in New Keynesian DSGE Models: Money-in-the-utility function, shopping time and cash-in-advance constraint, as well as two ways of modelling monetary policy, interest rate feedback rule and money growth rules. We use impulse response analysis, and a set of econometric distance measures based on comparing model and data variance-covariance matrices to compare the different models. We find all models closed by an estimated interest rate feedback rule imply counter-cyclical policy and inflation rates, which is at odds with the data. This problem is robust to the introduction of demand side shocks, but is not a feature of models closed by an estimated money growth rule. Drawing on our econometric analysis, we argue that the cash-in-advance model, closed by a money growth rule, comes closest to the data
    Original languageEnglish
    Number of pages35
    Publication statusPublished - 2007
    EventMoney Macro and Finance (MMF) Research Group 38th Annual Conference 2006 - York, United Kingdom
    Duration: 13 Sep 200615 Sep 2006

    Conference

    ConferenceMoney Macro and Finance (MMF) Research Group 38th Annual Conference 2006
    CountryUnited Kingdom
    CityYork
    Period13/09/0615/09/06

    Fingerprint

    Dynamic stochastic general equilibrium model
    Monetary policy
    Money growth
    Feedback rules
    Interest rates
    Impulse response analysis
    Modeling
    Cash-in-advance model
    Covariance matrix
    DSGE models
    Shopping
    Econometrics
    Distance measure
    Inflation rate
    Cash-in-advance constraint
    Utility function
    New Keynesian
    Econometric analysis

    Keywords

    • Intertemporal macroeconomics
    • role of money
    • Monetary policy
    • model selection
    • moment matching

    Cite this

    Bhattacharjee, A., & Thoenissen, C. (2007). Money and Monetary Policy in Dynamic Stochastic General Equilibrium Models. Paper presented at Money Macro and Finance (MMF) Research Group 38th Annual Conference 2006, York, United Kingdom.
    Bhattacharjee, Arnab ; Thoenissen, Christoph. / Money and Monetary Policy in Dynamic Stochastic General Equilibrium Models. Paper presented at Money Macro and Finance (MMF) Research Group 38th Annual Conference 2006, York, United Kingdom.35 p.
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    keywords = "Intertemporal macroeconomics, role of money, Monetary policy, model selection, moment matching",
    author = "Arnab Bhattacharjee and Christoph Thoenissen",
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    Bhattacharjee, A & Thoenissen, C 2007, 'Money and Monetary Policy in Dynamic Stochastic General Equilibrium Models' Paper presented at Money Macro and Finance (MMF) Research Group 38th Annual Conference 2006, York, United Kingdom, 13/09/06 - 15/09/06, .

    Money and Monetary Policy in Dynamic Stochastic General Equilibrium Models. / Bhattacharjee, Arnab; Thoenissen, Christoph.

    2007. Paper presented at Money Macro and Finance (MMF) Research Group 38th Annual Conference 2006, York, United Kingdom.

    Research output: Contribution to conferencePaper

    TY - CONF

    T1 - Money and Monetary Policy in Dynamic Stochastic General Equilibrium Models

    AU - Bhattacharjee, Arnab

    AU - Thoenissen, Christoph

    PY - 2007

    Y1 - 2007

    N2 - We compare three methods of motivating money in New Keynesian DSGE Models: Money-in-the-utility function, shopping time and cash-in-advance constraint, as well as two ways of modelling monetary policy, interest rate feedback rule and money growth rules. We use impulse response analysis, and a set of econometric distance measures based on comparing model and data variance-covariance matrices to compare the different models. We find all models closed by an estimated interest rate feedback rule imply counter-cyclical policy and inflation rates, which is at odds with the data. This problem is robust to the introduction of demand side shocks, but is not a feature of models closed by an estimated money growth rule. Drawing on our econometric analysis, we argue that the cash-in-advance model, closed by a money growth rule, comes closest to the data

    AB - We compare three methods of motivating money in New Keynesian DSGE Models: Money-in-the-utility function, shopping time and cash-in-advance constraint, as well as two ways of modelling monetary policy, interest rate feedback rule and money growth rules. We use impulse response analysis, and a set of econometric distance measures based on comparing model and data variance-covariance matrices to compare the different models. We find all models closed by an estimated interest rate feedback rule imply counter-cyclical policy and inflation rates, which is at odds with the data. This problem is robust to the introduction of demand side shocks, but is not a feature of models closed by an estimated money growth rule. Drawing on our econometric analysis, we argue that the cash-in-advance model, closed by a money growth rule, comes closest to the data

    KW - Intertemporal macroeconomics

    KW - role of money

    KW - Monetary policy

    KW - model selection

    KW - moment matching

    M3 - Paper

    ER -

    Bhattacharjee A, Thoenissen C. Money and Monetary Policy in Dynamic Stochastic General Equilibrium Models. 2007. Paper presented at Money Macro and Finance (MMF) Research Group 38th Annual Conference 2006, York, United Kingdom.