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Resurrecting the Role of Real Money Balance Effects

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  • José Dorich
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    Abstract

    I present a structural econometric analysis supporting the hypothesis that money is still relevant for shaping inflation and output dynamics in the United States. In particular, I find that real money balance effects are quantitatively important, although smaller than they used to be in the early postwar period. Moreover, I show three additional implications of the econometric estimates for monetary policy analysis. First, by including real money balance effects into the standard sticky price model, two stylized facts can be explained: the modestly procyclical real wage response to a monetary policy shock and the supply side effects of monetary policy. Second, the existence of real money balance effects causes higher volatility of output and lower volatility of interest rates under the optimal monetary policy. Third, the reduction in the size of real money balance effects can account for a significant decline in macroeconomic volatility.

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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 09-24.

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    Length: 45 pages
    Date of creation: 2009
    Date of revision:
    Handle: RePEc:bca:bocawp:09-24

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    Related research

    Keywords: Business fluctutations and cycles; Monetary aggregates; Transmission of monetary policy;

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