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Money in a DSGE framework with an application to the Euro Zone

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In the current New Keynesian literature, the role of monetary aggregates is generally neglected. Yet it’s hard to imagine money completely “passive” to the rest of the system. By entering real money balances in a non-separable utility function, we introduce an explicit role for money via preference redefinition in a simple New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. It involves new inflation and output gap specifications where money plays a significant role. We use the General Method of Moments (GMM) to calibrate our DSGE model of the Euro area and we show that the European Central Bank –ECB) should react more strongly to economic shocks as far as the role of money is found significant.

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Paper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number DR 09005.

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Length: 26 pages
Date of creation: Sep 2009
Handle: RePEc:ebg:essewp:dr-09005
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ESSEC Research Center, BP 105, 95021 Cergy, France

Web page: http://www.essec.edu/
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