Macroeconomic Policy in a Real Business Cycle Model with Money

This paper examines the impact of macroeconomic policy shocks in a Real- Business-Cycle Model with money. In addition to technology shocks, I include government consumption, government investment, tax rate and monetary policy as sources of random disturbances. Money is introduced in a shopping-time economy. In search of liquidity effect and persistent output effect in response to monetary shocks, a simple Taylor's rule is employed as an alternative approach of modeling monetary policy. The results show that (1) the extended model does a good job of mimicking the characteristics of post-war business cycles, however, it fails to captures some dynamic responses to monetary policy shock; (2) it is obvious, however, that monetary and fiscal shocks play important roles in the explanation of post-war business cycles; (3) incorporating Taylor's rule in the extended model improves the performances in the dynamic responses of nominal shocks. It not only captures liquidity effect but also generates higher persistence in output