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

Author

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  • Juan Paez-Farrell

    (Hull University & Julian Hodge Institute of Applied Macroeconomics)

Abstract

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.

Suggested Citation

  • Juan Paez-Farrell, 2003. "Monetary Policy and Business Cycle Analysis in an Optimising Model with Expectations Lags," Macroeconomics 0312002, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0312002 Note: Type of Document - ; pages: 32
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    References listed on IDEAS

    as
    1. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-775, August.
    2. Casares, Miguel & McCallum, Bennett T., 2006. "An optimizing IS-LM framework with endogenous investment," Journal of Macroeconomics, Elsevier, pages 621-644.
    3. Ellison, Martin & Scott, Andrew, 2000. "Sticky prices and volatile output," Journal of Monetary Economics, Elsevier, vol. 46(3), pages 621-632, December.
    4. King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007 Elsevier.
    5. Laurence Ball & David Romer, 1990. "Real Rigidities and the Non-Neutrality of Money," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 183-203.
    6. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    7. 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.
    8. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, pages 11-44.
    9. 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.
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    11. McCallum, Bennett T & Nelson, Edward, 1999. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 296-316, August.
    12. 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.
    13. Katharine S Neiss & Evi Pappa, 2002. "A monetary model of factor utilisation," Bank of England working papers 154, Bank of England.
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    15. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, pages 11-44.
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    18. Gropp, Reint & Vesala, Jukka, 2001. "Deposit insurance and moral hazard: does the counterfactual matter?," Working Paper Series 0047, European Central Bank.
    19. Holland, Allison & Scott, Andrew, 1998. "The Determinants of UK Business Cycles," Economic Journal, Royal Economic Society, vol. 108(449), pages 1067-1092, July.
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    More about this item

    Keywords

    Business Cycles; New Keynesian Phillips Curve; Monetary Policy; Real Rigidities; Investment Lags;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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