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The New Keynesian Model and the Euro Area Business Cycle

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  • Miguel Casares

Abstract

This paper describes a New Keynesian model incorporating transactions-facilitating money and a time-to-build constraint into endogenous capital accumulation. The calibrated New Keynesian model performs almost as well as the estimated vector autoregressive model in replicating Euro area cyclical correlations between key variables such as output and inflation, although it fares less well in predicting the procyclical dynamics of nominal interest rates. The presence of a time-to-build requirement in the model helps to improve its fit to Euro area data, whereas the role of transactions-facilitating money is much less important. Impulse-response functions and a decomposition of variance complete the analysis. Copyright Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2007.

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Bibliographic Info

Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.

Volume (Year): 69 (2007)
Issue (Month): 2 (04)
Pages: 209-244

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Handle: RePEc:bla:obuest:v:69:y:2007:i:2:p:209-244

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References

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  1. Jordi Galí & J. David López-Salido & Javier Vallés, 2002. "Understanding the effects of government spending on consumption," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 911, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2005.
  2. Gunter Coenen & Volker Wieland, 2000. "A Small Estimated Euro-Area Model with Rational Expectations and Nominal Rigidities," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1284, Econometric Society.
  3. Jag Chadha & Andrew Haldane & Norbert Janssen, 1998. "Shoe-leather costs reconsidered," Bank of England working papers, Bank of England 86, Bank of England.
  4. Miguel Casares & Bennett T. McCallum, 2000. "An Optimizing IS-LM Framework with Endogenous Investment," NBER Working Papers 7908, National Bureau of Economic Research, Inc.
  5. Miguel Casares, 2007. "Monetary Policy Rules in a New Keynesian Euro Area Model," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(4), pages 875-900, 06.
  6. L. J. �lvarez & E. Dhyne & M. Hoeberichts & C. Kwapil & H. Le Bihan & P. L�nnemann & F. Martins & R. Sabbatini & H. Stahl & P. Vermeulen & J. Vilmunen, 2005. "Sticky Prices in the Euro Area: a Summary of New Micro Evidence," DNB Working Papers, Netherlands Central Bank, Research Department 062, Netherlands Central Bank, Research Department.
  7. William Kerr & Robert G. King, 1996. "Limits on interest rate rules in the IS model," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Spr, pages 47-75.
  8. Robert G. King & Alexander L. Wolman, 1996. "Inflation targeting in a St. Louis model of the 21st century," Proceedings, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue May, pages 83-107.
  9. De Fiore, Fiorella & Teles, Pedro, 2002. "The Optimal Mix of Taxes on Money, Consumption and Income," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3437, C.E.P.R. Discussion Papers.
  10. Rochelle M. Edge, 2000. "Time-to-build, time-to-plan, habit-persistence, and the liquidity effect," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 673, Board of Governors of the Federal Reserve System (U.S.).
  11. Paul Gomme & Finn Kydland & Peter Rupert, 2000. "Home production meets time-to-build," Working Paper 0007R, Federal Reserve Bank of Cleveland.
  12. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What Happens After a Technology Shock?," NBER Working Papers 9819, National Bureau of Economic Research, Inc.
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  15. Michael R. Pakko, 1998. "Shoe-leather costs of inflation and policy credibility," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Nov, pages 37-50.
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  17. Casares, Miguel, 2006. "Time-to-build, monetary shocks, and aggregate fluctuations," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(6), pages 1161-1176, September.
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Cited by:
  1. Miguel Casares & Jesús Vázquez, 2012. "The Great Moderation of Inflation: a structural analysis of recent U.S. monetary business cycles," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra, Departamento de Economía - Universidad Pública de Navarra 1215, Departamento de Economía - Universidad Pública de Navarra.
  2. Erik Hjalmarsson & Par Osterholm, 2007. "A residual-based cointegration test for near unit root variables," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 907, Board of Governors of the Federal Reserve System (U.S.).

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