A Two-Pillar DSGE Monetary Policy Model for the Euro Area
Jean Barthélemy (),
Laurent Clerc () and
Magali Marx ()
Working papers from Banque de France
Whereas the bulk of the literature on DSGE models provides a rationale for inflation targeting strategies, there is no model doing such a job for the strategy implemented for almost ten years now by the Eurosystem and known as the "two-pillar monetary policy strategy". We try to address this issue by developing a small "two-pillar" DSGE model for the euro area. In this paper: 1) we allow real balances to appear both in the IS and Phillips curves; 2) we find some evidence that money plays a non-trivial role in explaining the euro area business cycle; 3) this provides a rationale for the central bank (the European Central Bank) to factor in monetary developments, by exploiting the long-run relationship between money growth and inflation, eventually accounting for structural shifts in velocity; 4) we found some evidence that the ECB has reacted systematically to a filtered measure of money growth and weaker evidence it has reacted more aggressively during high money growth periods ("excess liquidity").
Keywords: Monetary policy; Monetary aggregates; Monetary Policy Rules; Non-linearity, ECB (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 37 pages
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Journal Article: A two-pillar DSGE monetary policy model for the euro area (2011)
Working Paper: A two-pillar DSGE monetary policy model for the euro area (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:219
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