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Money in a Real Business Cycle Model

  • Farmer, Roger E A

This paper constructs a real business cycle model in which real money balances yield utility. We calibrate the model to fit the first moments of US data and simulate a set of impulse response functions that are generated by the model for GDP, the rate of interest, money growth and real balances. These theoretical impulse responses are compared with actual impulse responses from US data. The model does a reasonably good job of capturing the dynamic interactions of money and real variables in US data. It differs from most existing approaches by choosing a parameterization of utility for which the model admits the existence of indeterminate equilibria. It is argued that this fact is critical in explaining the monetary propagation mechanism.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1630.

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Date of creation: Apr 1997
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Handle: RePEc:cpr:ceprdp:1630
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  1. Martin Eichenbaum & Lawrence J. Christiano, 1992. "Liquidity Effects, Monetary Policy, and the Business Cycle," NBER Working Papers 4129, National Bureau of Economic Research, Inc.
  2. Jordi Galí, 1993. "Monopolistic competition, business cycles and the composition of aggregate demand," Economics Working Papers 45, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," RCER Working Papers 155, University of Rochester - Center for Economic Research (RCER).
  4. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
  5. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  6. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1995. "Capital Utilization and Returns to Scale," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 67-124 National Bureau of Economic Research, Inc.
  7. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  8. Susanto Basu & John G. Fernald, 1995. "Are Apparent Productive Spillovers a Figment of Specification Error?," NBER Working Papers 5073, National Bureau of Economic Research, Inc.
  9. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  10. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, vol. 81(4), pages 819-40, September.
  11. Wolfgang HÄRDLE & J. MARRON & L. YANG, 1996. "Discussion," SFB 373 Discussion Papers 1996,65, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  12. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
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