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Macroeconomic Policy in a Real Business Cycle Model with Money

  • Shiu-Sheng Chen

    (University of Wisconsin-Madison)

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

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Paper provided by EconWPA in its series Macroeconomics with number 0209011.

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Length: 53 pages
Date of creation: 24 Sep 2002
Date of revision: 24 Sep 2002
Handle: RePEc:wpa:wuwpma:0209011
Note: Type of Document - pdf; prepared on IBM PC - PC-TEX/UNIX Sparc TeX; to print on HP/PostScript/Franciscan monk; pages: 53 ; figures: included
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