Money and Information in a New Neoclassical Synthesis Framework

28 Pages Posted: 25 Jan 2010

See all articles by Philip Arestis

Philip Arestis

University of Cambridge - Department of Land Economy; Universidad del País Vasco (UPV/EHU)

Georgios E. Chortareas

University of Athens - Faculty of Economics; University of Essex - Department of Accounting, Finance & Management; King's College London

John D. Tsoukalas

University of Glasgow - Department of Economics

Abstract

We consider an (otherwise standard) New Neoclassical Synthesis theoretical framework that allows a role for money. Money in our model has an informational role which facilitates the estimation of the unobserved shocks that drive potential output and thus the state of the economy. For this purpose we estimate a small-scale sticky price model using Bayesian techniques. Our findings support the view that money has information value. This is reflected in higher precision in terms of unobserved model concepts such as the natural rate of output. Moreover, our results highlight how modelling money demand can provide insights about structural features of the economy that may be important for the design of interest rate rules. Focusing on money also allows for a step towards resolving the price puzzle. Money demand shocks can confound monetary policy shocks to generate a perverse price response in vector autoregressions (VAR).

Suggested Citation

Arestis, Philip and Chortareas, Georgios and Tsoukalas, John D., Money and Information in a New Neoclassical Synthesis Framework. The Economic Journal, Vol. 120, Issue 542, pp. F101-F128, February 2010. Available at SSRN: https://ssrn.com/abstract=1539714 or http://dx.doi.org/10.1111/j.1468-0297.2009.02339.x

Philip Arestis (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

Universidad del País Vasco (UPV/EHU)

Barrio Sarriena s/n
Leioa, Bizkaia 48940
Spain

Georgios Chortareas

University of Athens - Faculty of Economics ( email )

8 Pesmazoglou street
GR-10559 Athens
Greece
+(30) 210 3689805 (Phone)
+(30) 210 3689810 (Fax)

University of Essex - Department of Accounting, Finance & Management ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

King's College London ( email )

Strand
London, England WC2R 2LS
United Kingdom

John D. Tsoukalas

University of Glasgow - Department of Economics ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

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