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Monetary Aggregates and Liquidity in a Neo-Wicksellian Framework

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Author Info
Canzoneri, Matthew B
Cumby, Robert
Diba, Behzad
López-Salido, J David

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Abstract

Woodford (2003) describes a popular class of neo-Wicksellian models in which monetary policy is characterized by an interest-rate rule, and the money market and financial institutions are typically not even modelled. Critics contend that these models are incomplete and unsuitable for monetary-policy evaluation. Our Banks and Bonds model starts with a standard neo-Wicksellian model and then adds banks and a role for bonds in the liquidity management of households and banks. The Banks and Bonds model gives a more complete description of the economy, but the neo-Wicksellian model has the virtue of simplicity. Our purpose here is to see if the neo-Wicksellian model gives a reasonably accurate account of macroeconomic behaviour in the more complete Banks and Bonds 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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6813.

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Date of creation: May 2008
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Handle: RePEc:cpr:ceprdp:6813

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Related research
Keywords: Banks; Monetary Aggregates;

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Find related papers by JEL classification:
E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier. [Downloadable!] (restricted)
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  2. Fernando Alvarez & Robert E. Lucas, Jr. & Warren E. Weber, 2001. "Interest rates and inflation," Working Papers 609, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  3. Lawrence Christiano & Cosmin Ilut & Roberto Motto & Massimo Rostagno, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 955, European Central Bank. [Downloadable!]
  4. Canzoneri, Matthew B & Cumby, Robert & Diba, Behzad & López-Salido, J David, 2008. "Monetary and Fiscal Policy Coordination when Bonds Provide Transactions Services," CEPR Discussion Papers 6814, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Nelson, Edward, 2003. "The Future of Monetary Aggregates in Monetary Policy Analysis," CEPR Discussion Papers 3897, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December. [Downloadable!] (restricted)
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  7. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November. [Downloadable!] (restricted)
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  8. 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. [Downloadable!]
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  9. 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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  10. 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. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
  12. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Guillermo A. Calvo, 2009. "FINANCIAL CRISES AND LIQUIDITY SHOCKS: A Bank-Run Perspective," NBER Working Papers 15425, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Heinz-Peter Spahn, 2009. "The New Keynesian Microfoundations of Macroeconomics," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 317/2009, Department of Economics, University of Hohenheim, Germany. [Downloadable!]
  3. Tamborini, Roberto, 2009. "The "Credit-Cost Channel" of Monetary Policy. A Theoretical Assessment," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(13), pages 1-23. [Downloadable!]
    Other versions:
  4. Javier Andrés & Óscar J. Arce, 2009. "Banking competition, housing prices and macroeconomic stability," Banco de España Working Papers 0830, Banco de España. [Downloadable!]
  5. Matthew Canzoneri & Robert E. Cumby & Behzad Diba & David Lopez-Salido, 2008. "The Macroeconomic Implications of a Key Currency," NBER Working Papers 14242, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Felix Geiger & Oliver Sauter, 2009. "Deflationary vs. Inflationary Expectations - A New-Keynesian Perspective with Heterogeneous Agents and Monetary Believes," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 312/2009, Department of Economics, University of Hohenheim, Germany. [Downloadable!]
  7. Scheffel, Eric, 2008. "A Credit-Banking Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles," Cardiff Economics Working Papers E2008/30, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
  8. Alfonso Palacio Vera, 2008. "The "New consensus"and the Post-Keynesian approach to the analysis of liquidity traps," Documentos de trabajo de la Facultad de Ciencias Económicas y Empresariales 08-03, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales. [Downloadable!]
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