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Does Money Matter for the Identification of Monetary Policy Shocks: A DSGE Perspective

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  • Céline Poilly

    (Banque de France, DGEI-DIR, Service de Recherche en économie et finance, and University of Cergy-Pontoise,THEMA)

Abstract

This paper investigates how the identification assumptions of monetary policy shocks modify the inference in a standard DSGE model. Considering SVAR models in which either the interest rate is predetermined for money or these two monetary variables are simultaneously determined, two DSGE models are estimated by Minimum Distance Estimation. We emphasize that real balance effects are necessary to replicate the high persistence implied by the simultaneity assumption. In addition, the estimated monetary policy rule is strongly sensitive to the identification scheme. This suggests that the way to introduce money in the identification scheme is not neutral for estimation of DSGE models.

Suggested Citation

  • Céline Poilly, 2007. "Does Money Matter for the Identification of Monetary Policy Shocks: A DSGE Perspective," Thema Working Papers 2007-23, THEMA (Théorie Economique, Modélisation et Applications), CY Cergy-Paris University, ESSEC and CNRS.
    • Handle: RePEc:ema:worpap:2007-23
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    Cited by:

    1. Barthélemy, Jean & Clerc, Laurent & Marx, Magali, 2011. "A two-pillar DSGE monetary policy model for the euro area," Economic Modelling, Elsevier, vol. 28(3), pages 1303-1316, May.
    2. Li, Bing & Liu, Qing, 2017. "On the choice of monetary policy rules for China: A Bayesian DSGE approach," China Economic Review, Elsevier, vol. 44(C), pages 166-185.
    3. Ida, Daisuke, 2023. "The effect of real money balances on international monetary policy transmission," Journal of International Money and Finance, Elsevier, vol. 139(C).
    4. Benchimol, Jonathan, 2016. "Money and monetary policy in Israel during the last decade," Journal of Policy Modeling, Elsevier, vol. 38(1), pages 103-124.
    5. Araújo, Eurilton, 2015. "Monetary policy objectives and Money’s role in U.S. business cycles," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 85-107.
    6. Castelnuovo, Efrem, 2016. "Modest macroeconomic effects of monetary policy shocks during the great moderation: An alternative interpretation," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 300-314.
    7. V. Lewis & C. Poilly, 2011. "Firm Entry, Inflation and the Monetary Transmission Mechanism," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/705, Ghent University, Faculty of Economics and Business Administration.
    8. repec:spo:wpmain:info:hdl:2441/7umo3loae88ks85fddjte9ieal is not listed on IDEAS
    9. Efrem Castelnuovo, 2016. "Monetary policy shocks and Cholesky VARs: an assessment for the Euro area," Empirical Economics, Springer, vol. 50(2), pages 383-414, March.
    10. Ida, Daisuke, 2025. "The neo-Fisherian effect in a new Keynesian model with real money balances," The North American Journal of Economics and Finance, Elsevier, vol. 80(C).
    11. Castelnuovo, Efrem, 2013. "Monetary policy shocks and financial conditions: A Monte Carlo experiment," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 282-303.
    12. Ma, Yong & Lv, Lin, 2022. "Money, debt, and the effects of fiscal stimulus," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 152-178.

    More about this item

    Keywords

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    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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