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Taking the Monetary Implications of a Monetary Model Seriously

  • Kristin Van Gaasbeck

    ()

    (California State University, Sacramento)

  • Kevin Salyer

    ()

    (University of California, Davis)

It has become common practice in applied monetary economics to posit an interest rate rule as a component of the economic environment. Since the general equilibrium setting imposes a money demand relationship, the interest rate rule implies that the money supply is endogenous. Rarely are the properties of the money supply implied by the model compared to the data. In this paper, we take the monetary implications of a monetary model seriously in a limited participation model that permits both technology and money shocks. We model the money supply as an exogenous Markov process and calibrate the parameters of the Markov process to the data. We then examine whether the model produces an interest rate rule similar to the Taylor rule relationship observed in the data. The model is able to duplicate qualitatively the relationship between inflation and nominal interest implied by the Taylor rule, but fails dramatically to replicate the correlation between nominal interest rates and output.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 5 (2007)
Issue (Month): 21 ()
Pages: 1-7

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Handle: RePEc:ebl:ecbull:eb-07e40003
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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Working Paper Series, Macroeconomic Issues WP-96-28, Federal Reserve Bank of Chicago.
  2. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  3. Patrick Fève & Stéphane Auray, 2002. "Interest Rate and Inflation in Monetary Models with Exogenous Money Growth Rule," Economics Bulletin, AccessEcon, vol. 5(1), pages 1-10.
  4. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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