Money in an Estimated Business Cycle Model of the Euro Area

This article examines the role of money in a small-scale dynamic general equilibrium model of the euro zone estimated by maximum likelihood. The model allows for both intertemporal and intratemporal non-separability in preferences. We find, first, that real balances do not affect the marginal utilit...

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Bibliographic Details
Published in:The Economic journal (London) 2006-04, Vol.116 (511), p.457-477
Main Authors: Andrés, Javier, David López-Salido, J., Vallés, Javier
Format: Article
Language:English
Subjects:
Applied general equilibrium models
Business cycles
Demand for money
Demand shocks
Dynamic models
Economic and Monetary Union
Economic fluctuations
Economic models
Economic theory
Empirical tests
Euro
Euro Zone
Europe
Inflation rates
Inflation shocks
Interest rates
Macroeconomic policy
Maximum likelihood method
Model testing
Monetary models
Monetary policy
Money
Money demand
Nominal interest rates
Studies
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Summary:This article examines the role of money in a small-scale dynamic general equilibrium model of the euro zone estimated by maximum likelihood. The model allows for both intertemporal and intratemporal non-separability in preferences. We find, first, that real balances do not affect the marginal utility of consumption. Second, money demand shocks mainly help to forecast real balances while real shocks explain the bulk of price, output and interest rates fluctuations. Third, the calculation of the natural rate of interest reveals that the evolution of the interest rate is mostly accounted for by the real sources of fluctuations.
ISSN:0013-0133
1468-0297
DOI:10.1111/j.1468-0297.2006.01088.x