Monetary Aggregates and Liquidity in a Neo-Wicksellian Framework

Matthew B Canzoneri, Robert Cumby, Behzad Diba and López-Salido, J David

No 6813, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Woodford (2003) describes a popular class of neo-Wicksellian models in which monetary policy is characterized by an interest-rate rule, and the money market and financial institutions are typically not even modelled. Critics contend that these models are incomplete and unsuitable for monetary-policy evaluation. Our Banks and Bonds model starts with a standard neo-Wicksellian model and then adds banks and a role for bonds in the liquidity management of households and banks. The Banks and Bonds model gives a more complete description of the economy, but the neo-Wicksellian model has the virtue of simplicity. Our purpose here is to see if the neo-Wicksellian model gives a reasonably accurate account of macroeconomic behaviour in the more complete Banks and Bonds model. We do this by comparing the models’ second moments, variance decompositions and impulse response functions. We also study the role of monetary aggregates and velocity in predicting inflation in the two models.

Keywords: Banks; Monetary Aggregates (search for similar items in EconPapers)
JEL-codes: E51 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2008-05

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