Resurrecting the Role of Real Money Balance Effects
I present a structural econometric analysis supporting the hypothesis that money is still relevant for shaping inflation and output dynamics in the United States. In particular, I find that real money balance effects are quantitatively important, although smaller than they used to be in the early postwar period. Moreover, I show three additional implications of the econometric estimates for monetary policy analysis. First, by including real money balance effects into the standard sticky price model, two stylized facts can be explained: the modestly procyclical real wage response to a monetary policy shock and the supply side effects of monetary policy. Second, the existence of real money balance effects causes higher volatility of output and lower volatility of interest rates under the optimal monetary policy. Third, the reduction in the size of real money balance effects can account for a significant decline in macroeconomic volatility.
|Date of creation:||2009|
|Date of revision:|
|Contact details of provider:|| Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada|
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:09-24. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.