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Money in an Estimated Business Cycle Model of the Euro Area

Author

Listed:
  • Javier Andrés

    (Banco de España)

  • J. David López-Salido

    (Banco de España)

  • Javier Vallés

    (Banco de España)

Abstract

We present maximum likelihood estimates of a small scale dynamic general equilibrium model for the Eurozone. We pay special attention to the role of money, both through its direct effect upon private agents’ decisions and as a component of the monetary policy rule. Our results can be summarized as follows. First, we find no direct effect of money upon inflation and output but money growth plays a significant role in the interest rate rule. Second, money demand shocks mainly help to forecast real balances while real shocks explain the bulk of price, output and interest rates fluctuations. Third, the estimated model predicts sensible conditional correlations among those variables both to demand and supply disturbances. Finally, the systematic response of interest rates to money growth does not seem to have affected the output-inflation variability trade-off.

Suggested Citation

  • Javier Andrés & J. David López-Salido & Javier Vallés, 2001. "Money in an Estimated Business Cycle Model of the Euro Area," Working Papers 0121, Banco de España.
  • Handle: RePEc:bde:wpaper:0121
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