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Government Policy in Monetary Economies

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I study how the specific details of a micro founded monetary economy affect the determination of government policy. I consider three variants of the Lagos-Wright monetary framework: a benchmark were all markets are competitive; a case which allows for financial intermediaries; and a case with trading frictions. Although intitutions/frictions are shown to have a significant structural impact in the determination of policy, the calibrated artificial economies are observationally equivalent in steady state. The policy response to aggregate shocks is qualitatively similar in the variants considered. However, there are significant quantitative differences in the response of government policy to productivity shocks, mainly due to the idiosyncratic behavior of money demand. The variants with no trading frictions display the best fit to U.S. post-war data.

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File URL: http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp10-01.pdf
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Bibliographic Info

Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp10-01.

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Length: 36
Date of creation: Jun 2010
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Handle: RePEc:sfu:sfudps:dp10-01

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Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Phone: (778)782-3508
Fax: (778)782-5944
Web page: http://www.sfu.ca/economics.html
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Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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Web: http://www.sfu.ca/economics/research/publications.html

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Keywords: government policy; lack of commitment; financial intermediation; trading frictions; micro founded models of money;

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References

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  1. Aleksander Berentsen & Gabriele Camera, 2004. "Money, Credit, and Banking," 2004 Meeting Papers 473, Society for Economic Dynamics.
  2. Javier Díaz-Giménez & Giorgia Giovannetti & Ramon Marimon & Pedro Teles, 2004. "Nominal debt as a burden on monetary policy," Working Paper Series WP-04-10, Federal Reserve Bank of Chicago.
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  4. Fernando Martin, 2009. "A Positive Theory of Government Debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 608-631, October.
  5. Martin, Fernando M., 2011. "On the joint determination of fiscal and monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 132-145, March.
  6. Marco Battaglini & Stephen Coate, 2008. "Fiscal Policy over the Real Business Cycle: A Positive Theory," NBER Working Papers 14047, National Bureau of Economic Research, Inc.
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  14. Pere Gomis-Porqueras & Adrian Peralta-Alva, 2008. "Optimal monetary and fiscal policies in a search theoretic model of monetary exchange," Working Papers 2008-015, Federal Reserve Bank of St. Louis.
  15. Albert Marcet & Andrew Scott, 2001. "Debt and deficit fluctuations and the structure of bond markets," Economics Working Papers 558, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2003.
  16. Stefan Niemann, 2009. "Dynamic Monetary-Fiscal Interactions and the Role of Monetary Conservatism," Economics Discussion Papers 667, University of Essex, Department of Economics.
  17. Williamson, Stephen D. & Wright, Randall, 2010. "New Monetarist Economics: Models," MPRA Paper 21030, University Library of Munich, Germany.
  18. Boragan Aruoba, S. & Rocheteau, Guillaume & Waller, Christopher, 2007. "Bargaining and the value of money," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2636-2655, November.
  19. Fernando M. Martin, 2012. "Government Policy Response to War-Expenditure Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 25.
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Citations

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Cited by:
  1. Martin, Fernando M., 2011. "On the joint determination of fiscal and monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 132-145, March.
  2. Fernando M. Martin, 2011. "Lagos-Wright vs. Cash-in-Advance: Government Policy Response to War-Expenditure Shocks," 2011 Meeting Papers 745, Society for Economic Dynamics.
  3. Fernando M. Martin, 2012. "Government Policy Response to War-Expenditure Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 25.
  4. Parag Waknis, 2011. "Endogenous Monetary Policy: A Leviathan Central Bank in a Lagos-Wright Economy," Working papers 2011-20, University of Connecticut, Department of Economics.

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