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Monetary Aggregates and Liquidity in a Neo-Wicksellian Framework

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  • MATTHEW CANZONERI
  • ROBERT CUMBY
  • BEHZAD DIBA
  • DAVID LÃPEZ-SALIDO

Abstract

Woodford (2003) describes a popular class of neo-Wicksellian (NW) models in which monetary policy is characterized by an interest rate rule, and the money market and financial institutions are typically not even modeled. Critics contend that these models are incomplete and unsuitable for monetary policy evaluation. Our banks and bonds (BB) model starts with a standard NW model and then adds banks and a role for bonds in the liquidity management of households and banks. The BB model gives a more complete description of the economy, but the NW model has the virtue of simplicity. Our purpose here is to see if the NW model gives a reasonably accurate account of macroeconomic behavior in the more complete BB model. We do this by comparing the models' second moments, variance decompositions, and impulse response functions. We also study the role of monetary aggregates and velocity in predicting inflation in the two models. Copyright (c) 2008 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 40 (2008)
Issue (Month): 8 (December)
Pages: 1667-1698

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Handle: RePEc:mcb:jmoncb:v:40:y:2008:i:8:p:1667-1698

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
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  7. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
  8. Canzoneri, Matthew B. & Diba, Behzad T., 2005. "Interest rate rules and price determinacy: The role of transactions services of bonds," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 329-343, March.
  9. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
  10. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2007. "The Cost of Nominal Rigidity in NNS Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1563-1586, October.
  11. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
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