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Money and risk in a DSGE framework: A Bayesian application to the Eurozone

  • Benchimol, Jonathan
  • Fourçans, André

We present and test a model of the Eurozone, with a special emphasis on the role of risk aversion and money. The model follows the New Keynesian DSGE framework, money being introduced in the utility function with a non-separability assumption. Money is also introduced in the Taylor rule. By using Bayesian estimation techniques, we shed light on the determinants of output, inflation, money, interest rate, flexible-price output, and flexible-price real money balance dynamics. The role of money is investigated further. Its impact on output depends on the degree of risk aversion. Money plays a minor role in the estimated model. Yet, a higher level of risk aversion would imply that money had significant quantitative effects on business cycle fluctuations.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 34 (2012)
Issue (Month): 1 ()
Pages: 95-111

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Handle: RePEc:eee:jmacro:v:34:y:2012:i:1:p:95-111
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