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A Two-Pillar DSGE Monetary Policy Model for the Euro Area

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  • Barthélemy, J.
  • Clerc L.
  • Marx, M.

Abstract

Whereas the bulk of the literature on DSGE models provides a rationale for inflation targeting strategies, there is no model doing such a job for the strategy implemented for almost ten years now by the Eurosystem and known as the "two-pillar monetary policy strategy". We try to address this issue by developing a small "two-pillar" DSGE model for the euro area. In this paper: 1) we allow real balances to appear both in the IS and Phillips curves; 2) we find some evidence that money plays a non-trivial role in explaining the euro area business cycle; 3) this provides a rationale for the central bank (the European Central Bank) to factor in monetary developments, by exploiting the long-run relationship between money growth and inflation, eventually accounting for structural shifts in velocity; 4) we found some evidence that the ECB has reacted systematically to a filtered measure of money growth and weaker evidence it has reacted more aggressively during high money growth periods ("excess liquidity").

Suggested Citation

  • Barthélemy, J. & Clerc L. & Marx, M., 2008. "A Two-Pillar DSGE Monetary Policy Model for the Euro Area," Working papers 219, Banque de France.
  • Handle: RePEc:bfr:banfra:219
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    Cited by:

    1. Dai, Meixing, 2011. "Financial market imperfections and monetary policy strategy," Economic Modelling, Elsevier, pages 2609-2621.
    2. Philip Arestis & Georgios Chortareas & John D. Tsoukalas, 2010. "Money and Information in a New Neoclassical Synthesis Framework," Economic Journal, Royal Economic Society, vol. 120(542), pages 101-128, February.
    3. Benchimol, Jonathan, 2016. "Money and monetary policy in Israel during the last decade," Journal of Policy Modeling, Elsevier, pages 103-124.
    4. Benchimol, Jonathan & Fourçans, André, 2012. "Money and risk in a DSGE framework: A Bayesian application to the Eurozone," Journal of Macroeconomics, Elsevier, pages 95-111.
    5. Fabio Canova & Tobias Menz, 2011. "Does Money Matter in Shaping Domestic Business Cycles? An International Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 577-607, June.
    6. Canova, Fabio & Ferroni, Filippo, 2012. "The dynamics of US inflation: Can monetary policy explain the changes?," Journal of Econometrics, Elsevier, pages 47-60.
    7. Willi Leibfritz & Horst Rottmann, 2013. "Fiscal Policy During Business Cycles in Developing Countries: The Case of Africa," CESifo Working Paper Series 4484, CESifo Group Munich.
    8. Benchimol, Jonathan, 2014. "Risk aversion in the Eurozone," Research in Economics, Elsevier, pages 39-56.
    9. Benchimol, Jonathan, 2014. "Risk aversion in the Eurozone," Research in Economics, Elsevier, pages 39-56.
    10. Fabio Canova & Tobias Menz, 2009. "Does money matter in shaping domestic business cycles? An international investigation (with appendices)," Economics Working Papers 1242, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2010.
    11. Franz Seitz & Markus A. Schmidt, 2014. "Money In Modern Macro Models: A Review of the Arguments," Journal of Reviews on Global Economics, Lifescience Global, pages 156-174.
    12. Rhee, Hyuk-jae & Turdaliev, Nurlan, 2012. "Optimal monetary policy in a small open economy with inflation and output persistence," Economic Modelling, Elsevier, vol. 29(6), pages 2533-2542.

    More about this item

    Keywords

    Monetary policy ; Monetary aggregates ; Monetary Policy Rules ; Non-linearity; ECB;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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