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Money and Business Cycle in a Small Open Economy

  • Eduardo L. Giménez

    (Departamento de Fundamentos da Análise Económica e Historia Económica. Universidade de Vigo.)

  • José M. Martín-Moreno

    (Departamento de Fundamentos da Análise Económica e Historia Económica. Universidade de Vigo.)

This paper examines the consequences of introducing a cash-in-advance constraint in a small open economy business cycle model for the Spanish economy. A business cycle model is built extending Correia, Neves and Rebelo (1995) small open economy framework and Cooley and Hansen (1995) monetary economy. Money is introduced through a cash-in-advance constraint. The stochastic simulation of the model and its comparation with Spanish data shows that the model is able to mimic the real dimension of the business cycle. In particular the high volatility of compsumtion for the Spanish economy is greatly reproduced. Some features of the nominal dimension are also reproduced. As a negative result the high correlation between money and output, and labor market relations are not reproduced.

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Paper provided by IDEGA - Instituto Universitario de Estudios e Desenvolvemento de Galicia in its series Documentos de trabajo - Analise Economica with number 0012.

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Length: 48 pages
Date of creation: 2000
Date of revision:
Publication status: Published in Spanish Economic Review, 2002, pages 159-177
Handle: RePEc:edg:anecon:0012
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