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Money And Monetary Policy In Dynamic Stochastic General Equilibrium Models

  • ARNAB BHATTACHARJEE
  • CHRISTOPH THOENISSEN

We compare two methods of motivating money in New Keynesian dynamic stochastic general equilibrium models-money-in-the-utility function and the cash-in-advance (CIA) constraint-as well as two ways of modelling monetary policy: the interest rate feedback rule and money growth rules. As an aid to model selection, we use a new econometric measure of the distance between model and data variance-covariance matrices. The proposed measure is useful in distinguishing between alternative general equilibrium models. Drawing on our econometric analysis, we argue that the CIA model, closed by a money growth rule, comes closest to the data. Copyright � 2007 The Authors; Journal compilation � 2007 Blackwell Publishing Ltd and The University of Manchester.

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Article provided by University of Manchester in its journal Manchester School.

Volume (Year): 75 (2007)
Issue (Month): s1 (09)
Pages: 88-122

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Handle: RePEc:bla:manchs:v:75:y:2007:i:s1:p:88-122
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