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Government Policy in Monetary Economies

I study how the specific details of a micro founded monetary economy affect the determination of government policy. I consider three variants of the Lagos-Wright monetary framework: a benchmark were all markets are competitive; a case which allows for financial intermediaries; and a case with trading frictions. Although intitutions/frictions are shown to have a significant structural impact in the determination of policy, the calibrated artificial economies are observationally equivalent in steady state. The policy response to aggregate shocks is qualitatively similar in the variants considered. However, there are significant quantitative differences in the response of government policy to productivity shocks, mainly due to the idiosyncratic behavior of money demand. The variants with no trading frictions display the best fit to U.S. post-war data.

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File URL: http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp10-01.pdf
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Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp10-01.

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Length: 36
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:sfu:sfudps:dp10-01
Contact details of provider: Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Phone: (778)782-3508
Fax: (778)782-5944
Web page: http://www.sfu.ca/economics.html

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Order Information: Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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  1. Pere Gomis-Porqueras & Adrian Peralta-Alva, 2007. "Optimal Monetary and Fiscal Policies in a Search Theoretic Model of Monetary Exchange," 2007 Meeting Papers 84, Society for Economic Dynamics.
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  3. Fernando Martin, 2009. "On the Joint Determination of Fiscal and Monetary Policy," Discussion Papers dp09-01, Department of Economics, Simon Fraser University.
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  18. Ehud Kalai, 1977. "Proportional Solutions to Bargaining Situations: Interpersonal Utility Comparisons," Discussion Papers 179, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  19. S. Boragan Aruoba & Christopher J. Waller & Randall Wright, 2007. "Money and capital," Working Paper 0714, Federal Reserve Bank of Cleveland.
  20. Flodén, Martin, 2008. "A note on the accuracy of Markov-chain approximations to highly persistent AR(1) processes," Economics Letters, Elsevier, vol. 99(3), pages 516-520, June.
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  22. Stefan Niemann & Paul Pichler & Gerhard Sorger, 2009. "Inflation dynamics under optimal discretionary fiscal and monetary policies," Economics Discussion Papers 681, University of Essex, Department of Economics.
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