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Taking the Monetary Implications of a Monetary Model Seriously

Author

Listed:
  • Kristin Van Gaasbeck

    (California State University, Sacramento)

  • Kevin Salyer

    (University of California, Davis)

Abstract

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.

Suggested Citation

  • Kristin Van Gaasbeck & Kevin Salyer, 2007. "Taking the Monetary Implications of a Monetary Model Seriously," Economics Bulletin, AccessEcon, vol. 5(21), pages 1-7.
    • Handle: RePEc:ebl:ecbull:eb-07e40003
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    References listed on IDEAS

    as
    1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    2. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    3. Richard H. Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue mar.
    4. 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.
    5. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1997. "Sticky price and limited participation models of money: A comparison," European Economic Review, Elsevier, vol. 41(6), pages 1201-1249, June.
    6. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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    Citations

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    Cited by:

    1. Ceri Davies & Max Gillman & Michal Kejak, 2016. "Interest Rates Rules," Working Papers 1009, University of Missouri-St. Louis, Department of Economics.
    2. Davies, Ceri & Gillman, Max & Kejak, Michal, 2012. "Deriving the Taylor Principle when the Central Bank Supplies Money," Cardiff Economics Working Papers E2012/20, Cardiff University, Cardiff Business School, Economics Section.
    3. Chung, Kyuil, 2009. "Does the liquidity effect guarantee a positive term premium?," Economic Modelling, Elsevier, vol. 26(5), pages 893-903, September.
    4. Auray, Stéphane & Fève, Patrick, 2003. "Are Monetary Models with Exogenous Money Growth Rule Able to Match the Taylor Rule?," IDEI Working Papers 231, Institut d'Économie Industrielle (IDEI), Toulouse.

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    More about this item

    Keywords

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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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