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Monetary Policy and Business Cycle Analysis in an Optimising Model with Expectations Lags

  • Juan Paez-Farrell

    (Hull University & Julian Hodge Institute of Applied Macroeconomics)

Monetary models of the business cycle often neglect the importance of investment and the capital stock in the monetary transmission mechanism. Most of the recent literature assumes either investment adjustment costs or ignores capital altogether. This paper re-takes the argument put forward by Kydland and Prescott (1982) and Christiano and Todd (1996), namely, that firms face a planning period before undertaking investment expenditures. The resulting model is able to replicate some of the most salient characteristics of the business cycle, including lags from monetary policy actions to output.

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File URL: http://econwpa.repec.org/eps/mac/papers/0312/0312002.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0312002.

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Length: 32 pages
Date of creation: 05 Dec 2003
Date of revision:
Handle: RePEc:wpa:wuwpma:0312002
Note: Type of Document - ; pages: 32
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  2. Scott, Andrew, 1996. "The Determinants of UK Business Cycles," CEPR Discussion Papers 1409, C.E.P.R. Discussion Papers.
  3. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," RCER Working Papers 467, University of Rochester - Center for Economic Research (RCER).
  4. Bennett T. McCallum & Edward Nelson, . "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," GSIA Working Papers 1997-71, Carnegie Mellon University, Tepper School of Business.
  5. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
  6. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 23-27.
  7. Casares, M., 2001. "Business Cycle and Monetary Policy Analysis in a Structural Sticky-Price of the Euro Area," Papers 49, Quebec a Montreal - Recherche en gestion.
  8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  9. Miguel Casares & Bennett T. McCallum, 2000. "An Optimizing IS-LM Framework with Endogenous Investment," NBER Working Papers 7908, National Bureau of Economic Research, Inc.
  10. Katharine S Neiss & Evi Pappa, 2002. "A monetary model of factor utilisation," Bank of England working papers 154, Bank of England.
  11. Casares, Miguel, 2001. "Business cycle and monetary policy analysis in a structural sticky-price model of the euro area," Working Paper Series 0049, European Central Bank.
  12. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
  13. Jeanne, Olivier, 1998. "Generating real persistent effects of monetary shocks: How much nominal rigidity do we really need?," European Economic Review, Elsevier, vol. 42(6), pages 1009-1032, June.
  14. Martin Ellison & Andrew Scott, 2001. "Sticky prices and volatile output," Bank of England working papers 127, Bank of England.
  15. Laurence Ball & David Romer, 1987. "Real Rigidities and the Non-Neutrality of Money," NBER Working Papers 2476, National Bureau of Economic Research, Inc.
  16. Bennett T. McCallum, 1981. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc.
  17. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  18. Lawrence J. Christiano & Richard M. Todd, 1996. "Time to plan and aggregate fluctuations," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-27.
  19. Nelson, E., 1998. "Sluggish inflation and optimizing models of the business cycle," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 303-322, July.
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