Money and monetary policy in dynamic stochastic general equilibrium models

Arnab Bhattacharjee, Christoph Thoenissen

    Research output: Working paper

    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
    Publication statusPublished - 2005

    Publication series

    NameCDMA Working Paper Series

    Keywords

    • intertemporal macroeconomics
    • role of money
    • monetary policy
    • model selection
    • moment matching

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