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Money and risk aversion in a DSGE framework: a Bayesian application to the Euro zone

  • Jonathan Benchimol

    ()

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, TEAM - Théories et Applications en Microéconomie et Macroéconomie - CNRS : UMR8059 - Université Paris I - Panthéon-Sorbonne, Economics Department - ESSEC Business School)

  • André Fourçans

    ()

    (Economics Department - ESSEC Business School, THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise)

In this paper, we set up and test a model of the Euro zone, with a special emphasis on the role of money. The model follows the New Keynesian DSGE framework, money being introduced in the utility function with a non-separability assumption. By using Bayesian estimation techniques, we shed light on the determinants of output and inflation, but also of the interest rate, real money balances, flexible-price output and flexible-price real money balances variances. The role of money is investigated further. We find that its impact on output depends on the degree of agents' risk aversion, increases with this degree, and becomes significant when risk aversion is high enough. The direct impact of the money variable on inflation variability is essentially minor whatever the risk aversion level, the interest rate (monetary policy) being the overwhelming explanatory factor.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number hal-00800082.

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Date of creation: 16 Apr 2010
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Handle: RePEc:hal:cesptp:hal-00800082
Note: View the original document on HAL open archive server: http://hal-paris1.archives-ouvertes.fr/hal-00800082
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  1. 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.
  2. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
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  12. Jesus Garcia-Iglesias, 2007. "How the European Central Bank decided its early monetary policy?," Applied Economics, Taylor & Francis Journals, vol. 39(7), pages 927-936.
  13. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2007. "Two Reasons Why Money and Credit May be Useful in Monetary Policy," NBER Working Papers 13502, National Bureau of Economic Research, Inc.
  14. 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.
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  16. Jones, Barry E. & Stracca, Livio, 2008. "Does money matter in the IS curve? The case of the UK," Working Paper Series 0904, European Central Bank.
  17. 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.
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