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Money in an Estimated Business Cycle Model of the Euro Area

Javier Andrés (), David Lopez-Salido () and Javier Valles

Economic Journal, 2006, vol. 116, issue 511, 457-477

Abstract: 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. Copyright 2006 Royal Economic Society.

Date: 2006
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