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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://128.118.178.162/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://128.118.178.162

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  1. 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.
  2. 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.
  3. Olivier Jeanne, 1997. "Generating Real Persistent Effects of Monetary Shocks: How Much Nominal Rigidity Do We Really Need?," NBER Working Papers 6258, National Bureau of Economic Research, Inc.
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  5. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168.
  6. Miguel Casares, 2001. "Business Cycle and Monetary Policy Analysis in a Structural Sticky- Price Model of The Euro Area," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 0109, Departamento de Economía - Universidad Pública de Navarra.
  7. Scott, Andrew, 1996. "The Determinants of UK Business Cycles," CEPR Discussion Papers 1409, C.E.P.R. Discussion Papers.
  8. Nelson, E., 1998. "Sluggish inflation and optimizing models of the business cycle," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 303-322, July.
  9. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  10. Katharine S Neiss & Evi Pappa, 2002. "A monetary model of factor utilisation," Bank of England working papers 154, Bank of England.
  11. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," RCER Working Papers 467, University of Rochester - Center for Economic Research (RCER).
  12. 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.
  13. Casares, Miguel & McCallum, Bennett T., 2006. "An optimizing IS-LM framework with endogenous investment," Journal of Macroeconomics, Elsevier, vol. 28(4), pages 621-644, December.
  14. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Staff Report 102, Federal Reserve Bank of Minneapolis.
  15. Ball, Laurence & Romer, David, 1990. "Real Rigidities and the Non-neutrality of Money," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 183-203, April.
  16. Ellison, Martin & Scott, Andrew, 2000. "Sticky prices and volatile output," Journal of Monetary Economics, Elsevier, vol. 46(3), pages 621-632, December.
  17. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 23-27.
  18. 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.
  19. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
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