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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. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2005. "Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through," Working Paper Series 179, Sveriges Riksbank (Central Bank of Sweden).
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  10. Lindé, Jesper, 2001. "Estimating New-Keynesian Phillips Curves: A Full Information Maximum Likelihood Approach," Working Paper Series 129, Sveriges Riksbank (Central Bank of Sweden), revised 30 Apr 2001.
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  12. 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.
  13. Fourcans, Andre & Vranceanu, Radu, 2007. "The ECB monetary policy: Choices and challenges," Journal of Policy Modeling, Elsevier, vol. 29(2), pages 181-194.
  14. Sylvia Kaufmann & Peter Kugler, 2008. "Does Money Matter For Inflation In The Euro Area?," Contemporary Economic Policy, Western Economic Association International, vol. 26(4), pages 590-606, October.
  15. 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.
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  17. Roberto Golinelli & Sergio Pastorello, 2002. "Modelling the demand for M3 in the Euro area," The European Journal of Finance, Taylor & Francis Journals, vol. 8(4), pages 371-401.
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