Money and Monetary Policy in Dynamic Stochastic General Equilibrium Models

Arnab Bhattacharjee; Christoph Thoenissen

Money and Monetary Policy in Dynamic Stochastic General Equilibrium Models

Arnab Bhattacharjee
, Christoph Thoenissen

Research output: Contribution to conference › Paper

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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 language	English
Number of pages	35
Publication status	Published - 2007
Event	Money Macro and Finance (MMF) Research Group 38th Annual Conference 2006 - York, United Kingdom Duration: 13 Sept 2006 → 15 Sept 2006

Conference

Conference	Money Macro and Finance (MMF) Research Group 38th Annual Conference 2006
Country/Territory	United Kingdom
City	York
Period	13/09/06 → 15/09/06

Keywords

Intertemporal macroeconomics
role of money
Monetary policy
model selection
moment matching

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Money and monetary policy in dynamic stochastic general equilibrium models
Bhattacharjee, A. & Thoenissen, C., 1 Sept 2007, In: Manchester School. 75, S1, p. 88-122 35 p.
Research output: Contribution to journal › Meeting abstract › peer-review
7 Link opens in a new tab Citations (Scopus)

Cite this

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title = "Money and Monetary Policy in Dynamic Stochastic General Equilibrium Models",

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",

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author = "Arnab Bhattacharjee and Christoph Thoenissen",

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language = "English",

note = "Money Macro and Finance (MMF) Research Group 38th Annual Conference 2006 ; Conference date: 13-09-2006 Through 15-09-2006",

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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

T2 - Money Macro and Finance (MMF) Research Group 38th Annual Conference 2006

Y2 - 13 September 2006 through 15 September 2006

ER -

Money and Monetary Policy in Dynamic Stochastic General Equilibrium Models

Abstract

Conference

Keywords

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Research output

Money and monetary policy in dynamic stochastic general equilibrium models

Cite this