IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/91829.html

Revisiting the AA-DD model in Zero Lower Bound

Author

Listed:
  • MAO TAKONGMO, Charles Olivier

Abstract

This paper proposes a simple model of a mechanism through which exchange rate can affect the link between output and government spending in zero lower bound (ZLB) periods. In our proposed model, the expected near-future interest rate is added as an endogenous variable. Unlike existing AA-DD models in ZLB, the nominal exchange rate is no longer constant. Our model predicts that the output effect of an increase in government spending in a ZLB period is deflected by an appreciation of the current exchange rate. The AA-DD model is taught in almost all economic departments. The model is also generally used by many central banks and governments. The existing AA-DD model can be misleading. Our new AA-DD model may help to update the existing model in ZLB periods. Our AA-DD model is also consistent with recent dynamic stochastic general equilibrium models in open economies in ZLB periods.

Suggested Citation

  • MAO TAKONGMO, Charles Olivier, 2019. "Revisiting the AA-DD model in Zero Lower Bound," MPRA Paper 91829, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:91829
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/91829/1/MPRA_paper_91829.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 66(4), pages 545-556.
    2. Charles Olivier Mao Takongmo, 2017. "Government-spending multipliers and the zero lower bound in an open economy," Review of International Economics, Wiley Blackwell, vol. 25(5), pages 1046-1077, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xavier Ragot, 2005. "A theory of low inflation in a non Ricardian economy with credit constraints," PSE Working Papers halshs-00590788, HAL.
    2. Javier G�mez P., 1998. "La Demanda Por Dinero En Colombia," Borradores de Economia 2969, Banco de la Republica.
    3. Lucas, Robert E, Jr, 1996. "Nobel Lecture: Monetary Neutrality," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 661-682, August.
    4. Mirza Hammad Hassan & Hussain Haroon & Sarwar Ghulam & Habib Haroon, 2024. "Corporate Internationalization and Uncertainty of Cash Holdings: Evidence from an Emerging Market," Zagreb International Review of Economics and Business, Sciendo, vol. 27(1), pages 79-95.
    5. Neil R. Ericsson, 2021. "Dynamic Econometrics in Action: A Biography of David F. Hendry," International Finance Discussion Papers 1311, Board of Governors of the Federal Reserve System (U.S.).
    6. Ansgar Belke & Robert Czudaj, 2010. "Is Euro Area Money Demand (Still) Stable? Cointegrated VAR Versus Single Equation Techniques," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 56(4), pages 285-315.
    7. Schulze, David Louis, 1969. "A general equilibrium study of the monetary mechanism," ISU General Staff Papers 196901010800005149, Iowa State University, Department of Economics.
    8. Michalski, Grzegorz, 2006. "Risk-based cash demand in a firm," MPRA Paper 4541, University Library of Munich, Germany, revised 06 Sep 2006.
    9. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2002. "Money, Interest Rates, and Exchange Rates with Endogenously Segmented Markets," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 73-112, February.
    10. Archankul, Arnon & Ferrari, Giorgio & Hellmann, Tobias & Thijssen, Jacco J.J., 2025. "Singular control in a cash management model with ambiguity," European Journal of Operational Research, Elsevier, vol. 327(2), pages 500-514.
    11. repec:upd:utmpwp:002 is not listed on IDEAS
    12. Yin‐Wong Cheung & Xingwang Qian, 2009. "Hoarding of International Reserves: Mrs Machlup's Wardrobe and the Joneses," Review of International Economics, Wiley Blackwell, vol. 17(4), pages 824-843, September.
    13. Benjamin Eden, 2009. "The Role of Government in the Credit Market," Vanderbilt University Department of Economics Working Papers 0907, Vanderbilt University Department of Economics.
    14. Valerie R. Bencivenga & Bruce Smith, 2003. "Monetary policy and financial market evolution," Review, Federal Reserve Bank of St. Louis, vol. 85(Jul), pages 7-26.
    15. Boucekkine, R. & Laksaci, M. & Touati-Tliba, M., 2021. "Long-run stability of money demand and monetary policy: The case of Algeria," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).
    16. Ding, Chengri & Knaap, Gerrit J. & Hopkins, Lewis D., 1999. "Managing Urban Growth with Urban Growth Boundaries: A Theoretical Analysis," Journal of Urban Economics, Elsevier, vol. 46(1), pages 53-68, July.
    17. Jan Tin, 2010. "Bequest motives and household money demand," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 34(3), pages 269-283, July.
    18. Ueda, Kozo, 2024. "Effects of bank branch/ATM consolidations on cash demand: Evidence from bank account transaction data in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 71(C).
    19. Sofia Priazhkina & Samuel Palmer & Pablo Martín-Ramiro & Román Orús & Samuel Mugel & Vladimir Skavysh, 2024. "Digital Payments in Firm Networks: Theory of Adoption and Quantum Algorithm," Staff Working Papers 24-17, Bank of Canada.
    20. Max Gillman & Michal Kejak, 2005. "Inflation and Balanced-Path Growth with Alternative Payment Mechanisms," Economic Journal, Royal Economic Society, vol. 115(500), pages 247-270, January.
    21. Hirokazu Ishise Nao Sudo, 2013. "Inventory‐Theoretic Money Demand and Relative Price Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(2‐3), pages 299-326, March.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:91829. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.