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Money in the Production Function: a new Keynesian DSGE perspective

This paper proposes a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model where real money balances enter the production function. By using a Bayesian analysis, our model shows that money is not an omitted input to the production process and rejects the decreasing returns to scale hypothesis. Our simulations suggest that money plays a negligible role in the dynamics of output and inflation, despite its inclusion in the production function. In addition, we introduce the flexible-price real money balances concept.

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File URL: http://hal-essec.archives-ouvertes.fr/docs/00/79/55/47/PDF/WP1304.pdf
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Paper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number WP1304.

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Length: 33 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:ebg:essewp:dr-13004
Contact details of provider: Postal:
ESSEC Research Center, BP 105, 95021 Cergy, France

Web page: http://www.essec.edu/
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  1. Fischer, Stanley, 1974. "Money and the Production Function," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 517-33, December.
  2. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2007. "Evaluating An Estimated New Keynesian Small Open Economy Model," Working Paper Series 203, Sveriges Riksbank (Central Bank of Sweden).
  3. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1997. "Sticky price and limited participation models of money: A comparison," European Economic Review, Elsevier, vol. 41(6), pages 1201-1249, June.
  4. John Geweke, 1999. "Using simulation methods for bayesian econometric models: inference, development,and communication," Econometric Reviews, Taylor & Francis Journals, vol. 18(1), pages 1-73.
  5. Jonathan Benchimol & André Fourçans, 2010. "Money and risk aversion in a DSGE framework : a bayesian application to the euro zone," Post-Print hal-00572374, HAL.
  6. Smets, Frank & Wouters, Rafael, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers 6112, C.E.P.R. Discussion Papers.
  7. Hasan, M Aynul & Mahmud, Syed F, 1993. "Is Money an Omitted Variable in the Production Function? Some Further Results," Empirical Economics, Springer, vol. 18(3), pages 431-45.
  8. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  9. Sinai, Allen & Stokes, Houston H, 1975. "Real Money Balances: An Omitted Variable from the Production Function? A Reply," The Review of Economics and Statistics, MIT Press, vol. 57(2), pages 247-52, May.
  10. Milton Friedman, 1959. "The Demand for Money: Some Theoretical and Empirical Results," Journal of Political Economy, University of Chicago Press, vol. 67, pages 327.
  11. Jong S. You, 1981. "Money, Technology, and the Production Function: An Empirical Study," Canadian Journal of Economics, Canadian Economics Association, vol. 14(3), pages 515-24, August.
  12. Carl E. Walsh, 2010. "Monetary Theory and Policy, Third Edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262013770, June.
  13. Ireland, Peter N, 2004. "Money's Role in the Monetary Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 969-83, December.
  14. Cynthia Benzing, 1989. "An Update on Money in the Production Function," Eastern Economic Journal, Eastern Economic Association, vol. 15(3), pages 235-239, Jul-Sep.
  15. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 1999. "Monetary Policy and Multiple Equilibria," Departmental Working Papers 199914, Rutgers University, Department of Economics.
  16. Startz, Richard, 1984. "Can money matter?," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 381-385, May.
  17. Sinai, Allen & Stokes, Houston, 1977. "Real Money Balances as a Variable in the Production Function: A Further Reply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(2), pages 372-73, May.
  18. Ben-Zion, Uri & Ruttan, Vernon W, 1975. "Money in the Production Function: An Interpretation of Empirical Results," The Review of Economics and Statistics, MIT Press, vol. 57(2), pages 246-47, May.
  19. Masoud Moghaddam, 2010. "Co-integrated money in the production function-evidence and implications," Applied Economics, Taylor & Francis Journals, vol. 42(8), pages 957-963.
  20. Allen Sinai & Houston H. Stokes, 1989. "Money Balances in the Production Function: A Retrospective Look," Eastern Economic Journal, Eastern Economic Association, vol. 15(4), pages 349-363, Oct-Dec.
  21. Short, Eugenie Dudding, 1979. "A New Look at Real Money Balances as a Variable in the Production Function," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 326-39, August.
  22. Rabanal, Pau & Rubio-Ramirez, Juan F., 2005. "Comparing New Keynesian models of the business cycle: A Bayesian approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1151-1166, September.
  23. Sinai, Allen & Stokes, Houston H, 1972. "Real Money Balances: An Omitted Variable from the Production Functions?," The Review of Economics and Statistics, MIT Press, vol. 54(3), pages 290-96, August.
  24. Johnson, Harry G, 1969. "Inside Money, Outside Money, Income, Wealth, and Welfare in Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 30-45, February.
  25. Adolfson, Malin & Laseen, Stefan & Linde, Jesper & Villani, Mattias, 2007. "Bayesian estimation of an open economy DSGE model with incomplete pass-through," Journal of International Economics, Elsevier, vol. 72(2), pages 481-511, July.
  26. Khan, Ashfaque H & Ahmad, Mushtaq, 1985. "Real Money Balances in the Production Function of a Developing Country," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 336-40, May.
  27. Allen Sinai & Houston H. Stokes, 1991. "Real Money Balances in the Production Function: A Comment," Eastern Economic Journal, Eastern Economic Association, vol. 17(4), pages 533-535, Oct-Dec.
  28. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  29. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
  30. Miguel Casares, 2007. "Monetary Policy Rules in a New Keynesian Euro Area Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 875-900, 06.
  31. Stein, Jerome L, 1970. "Monetary Growth Theory in Perspective," American Economic Review, American Economic Association, vol. 60(1), pages 85-106, March.
  32. Subrahmanyam, Ganti, 1980. "Real Money Balances as a Factor of Production: Some New Evidence," The Review of Economics and Statistics, MIT Press, vol. 62(2), pages 280-83, May.
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