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Should we take inside money seriously?

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  • Stracca, Livio

Abstract

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

Suggested Citation

  • Stracca, Livio, 2007. "Should we take inside money seriously?," Working Paper Series 841, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2007841
    Note: 335958
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp841.pdf
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    References listed on IDEAS

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    Cited by:

    1. Güntner, Jochen H.F., 2011. "Competition among banks and the pass-through of monetary policy," Economic Modelling, Elsevier, vol. 28(4), pages 1891-1901, July.
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    More about this item

    Keywords

    deposit in advance constraint; dynamic general equilibrium models; Endogenous money; inside money; monetary policy;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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