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Money in a DSGE framework with an application to the Euro Zone

  • André Fourçans

    (Economics Department - Essec Business School)

  • Jonathan Benchimol

    (Economics Department - Essec Business School)

In the current New Keynesian literature, the role of monetary aggregates is generally neglected. Yet it's hard to imagine money completely “passive” to the rest of the system. By entering real money balances in a non-separable utility function, we introduce an explicit role for money via preference redefinition in a simple New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. It involves new inflation and output gap specifications where money plays a significant role. We use the General Method of Moments (GMM) to calibrate our DSGE model of the Euro area and we show that the European Central Bank –ECB) should react more strongly to economic shocks as far as the role of money is found significant.

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Date of creation: Sep 2009
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Publication status: Published in ESSEC Working paper. Document de Recherche ESSEC / Centre de recherche de l'ESSEC ISSN : 1291-961.. 2009
Handle: RePEc:hal:journl:hal-00553495
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