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A Two-Pillar DSGE Monetary Policy Model for the Euro Area

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  • Barthélemy, J.
  • Clerc L.
  • Marx, M.

Abstract

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").

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 219.

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Length: 37 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:bfr:banfra:219

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Web page: http://www.banque-france.fr/
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Keywords: Monetary policy ; Monetary aggregates ; Monetary Policy Rules ; Non-linearity; ECB;

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References

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Citations

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Cited by:
  1. André Fourçans & Jonathan Benchimol, 2009. "Money in a DSGE framework with an application to the Euro Zone," Post-Print hal-00553495, HAL.
  2. Rhee, Hyuk-jae & Turdaliev, Nurlan, 2012. "Optimal monetary policy in a small open economy with inflation and output persistence," Economic Modelling, Elsevier, vol. 29(6), pages 2533-2542.
  3. Jonathan Benchimol, 2012. "Risk Aversion in the Euro area," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00713669, HAL.
  4. Seitz, Franz & Schmidt, Markus A., 2014. "Money in modern macro models: A review of the arguments," OTH im Dialog: Weidener Diskussionspapiere 37, University of Applied Sciences Amberg-Weiden (OTH).
  5. Dai, Meixing, 2011. "Financial market imperfections and monetary policy strategy," Economic Modelling, Elsevier, vol. 28(6), pages 2609-2621.
  6. Canova, Fabio & Menz, Tobias, 2010. "Does money matter in shaping domestic business cycles? An international investigation," CEPR Discussion Papers 8107, C.E.P.R. Discussion Papers.
  7. Benchimol, Jonathan, 2014. "Risk aversion in the Eurozone," Research in Economics, Elsevier, vol. 68(1), pages 39-56.
  8. Fabio Canova & Tobias Menz, 2010. "Does Money Matter in Shaping Domestic Business Cycles? An International Investigation (with appendices)," Working Papers 516, Barcelona Graduate School of Economics.

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