Money and Monetary Policy in Stochastic General Equilibrium Models

Arnab Bhattacharjee, Christoph Thoenissen

    Research output: Working paper

    51 Downloads (Pure)

    Abstract

    We compare two methods of motivating money in New Keynesian DSGE Models: Money-in-the-utility function and cash-in-advance constraint, as well as two ways of modelling monetary policy: interest rate feedback rule and money growth rules. As an aid to model selection, we use a new econometric measure of the distance between model and data variance-covariance matrices. The proposed measure is useful in distinguishing between alternative general equilibrium models. We find that the 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 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
    Place of PublicationSt. Andrews
    PublisherCentre for Dynamic Macroeconomic Analysis
    Number of pages36
    Publication statusPublished - 2005

    Publication series

    NameCDMA Working Paper Series
    PublisherSchool of Economics and Finance, University of St. Andrews
    No.CDMA05/11

    Fingerprint

    Monetary policy
    Stochastic general equilibrium models
    Money growth
    Feedback rules
    Interest rates
    Modeling
    Model selection
    Cash-in-advance model
    Covariance matrix
    DSGE models
    Econometrics
    Inflation rate
    Cash-in-advance constraint
    Utility function
    New Keynesian
    General equilibrium model
    Econometric analysis

    Keywords

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

    Cite this

    Bhattacharjee, A., & Thoenissen, C. (2005). Money and Monetary Policy in Stochastic General Equilibrium Models. (CDMA Working Paper Series; No. CDMA05/11). St. Andrews: Centre for Dynamic Macroeconomic Analysis.
    Bhattacharjee, Arnab ; Thoenissen, Christoph. / Money and Monetary Policy in Stochastic General Equilibrium Models. St. Andrews : Centre for Dynamic Macroeconomic Analysis, 2005. (CDMA Working Paper Series; CDMA05/11).
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    Bhattacharjee, A & Thoenissen, C 2005 'Money and Monetary Policy in Stochastic General Equilibrium Models' CDMA Working Paper Series, no. CDMA05/11, Centre for Dynamic Macroeconomic Analysis, St. Andrews.

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

    St. Andrews : Centre for Dynamic Macroeconomic Analysis, 2005. (CDMA Working Paper Series; No. CDMA05/11).

    Research output: Working paper

    TY - UNPB

    T1 - Money and Monetary Policy in Stochastic General Equilibrium Models

    AU - Bhattacharjee, Arnab

    AU - Thoenissen, Christoph

    PY - 2005

    Y1 - 2005

    N2 - We compare two methods of motivating money in New Keynesian DSGE Models: Money-in-the-utility function and cash-in-advance constraint, as well as two ways of modelling monetary policy: interest rate feedback rule and money growth rules. As an aid to model selection, we use a new econometric measure of the distance between model and data variance-covariance matrices. The proposed measure is useful in distinguishing between alternative general equilibrium models. We find that the 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 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 two methods of motivating money in New Keynesian DSGE Models: Money-in-the-utility function and cash-in-advance constraint, as well as two ways of modelling monetary policy: interest rate feedback rule and money growth rules. As an aid to model selection, we use a new econometric measure of the distance between model and data variance-covariance matrices. The proposed measure is useful in distinguishing between alternative general equilibrium models. We find that the 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 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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    KW - role of money

    KW - Monetary policy

    KW - model selection

    KW - moment matching

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    BT - Money and Monetary Policy in Stochastic General Equilibrium Models

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    Bhattacharjee A, Thoenissen C. Money and Monetary Policy in Stochastic General Equilibrium Models. St. Andrews: Centre for Dynamic Macroeconomic Analysis. 2005. (CDMA Working Paper Series; CDMA05/11).