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Should we take inside money seriously?

  • Stracca, Livio

This paper presents a dynamic general equilibrium model with sticky prices, in which "inside" money, made out of commercial banks’ liabilities, plays an active, structural role role. It is shown that, in such a model, an inside money shock has a well-defined meaning. A calibrated version of the model is shown to generate small, but non-negligible effects of inside money shocks on output and inflation. I also simulate the effect of a banking crisis in the model. Moreover, I find that it is optimal for monetary policy to react to such shocks, although reacting to inflation alone does not result in a significant welfare loss. JEL Classification: E43

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Paper provided by European Central Bank in its series Working Paper Series with number 0841.

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Date of creation: Dec 2007
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Handle: RePEc:ecb:ecbwps:20070841
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