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Money and risk in a DSGE framework: A Bayesian application to the Eurozone

Jonathan Benchimol () and André Fourçans ()
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André Fourçans: THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique

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Abstract: We present and test a model of the Eurozone, with a special emphasis on the role of risk aversion and money. The model follows the New Keynesian DSGE framework, money being introduced in the utility function with a non-separability assumption. Money is also introduced in the Taylor rule. By using Bayesian estimation techniques, we shed light on the determinants of output, inflation, money, interest rate, flexible-price output, and flexible-price real money balance dynamics. The role of money is investigated further. Its impact on output depends on the degree of risk aversion. Money plays a minor role in the estimated model. Yet, a higher level of risk aversion would imply that money had significant quantitative effects on business cycle fluctuations.

Keywords: Euro area; Money; Risk; Bayesian estimation; DSGE; Eurozone (search for similar items in EconPapers)
Date: 2012-03-01
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Published in Journal of Macroeconomics, Elsevier, 2012, 34 (1), pp.95-111. ⟨10.1016/j.jmacro.2011.10.003⟩

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DOI: 10.1016/j.jmacro.2011.10.003

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