Money and Monetary Policy in Stochastic General Equilibrium Models

Arnab Bhattacharjee () and Christoph Thoenissen ()

CDMA Working Paper Series from Centre for Dynamic Macroeconomic Analysis

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.

Keywords: Intertemporal macroeconomics; role of money; monetary policy; model selection; moment matching. (search for similar items in EconPapers)
JEL-codes: C13 E32 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-upt
Date: 2005-10, Revised 2007-02
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Persistent link: http://EconPapers.repec.org/RePEc:san:cdmawp:0511

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