Money in an Estimated Business Cycle Model of the Euro Area

21 Pages Posted: 8 May 2006

See all articles by Javier Andrés

Javier Andrés

University of Valencia - Department of Economics

David Lopez-Salido

Board of Governors of the Federal Reserve System

Javier Vallés

Government of the Kingdom of Spain - Economic Bureau of the President

Abstract

This article examines the role of money in a small-scale dynamic general equilibrium model of the euro zone estimated by maximum likelihood. The model allows for both intertemporal and intratemporal non-separability in preferences. We find, first, that real balances do not affect the marginal utility of consumption. Second, money demand shocks mainly help to forecast real balances while real shocks explain the bulk of price, output and interest rates fluctuations. Third, the calculation of the natural rate of interest reveals that the evolution of the interest rate is mostly accounted for by the real sources of fluctuations.

Suggested Citation

Andrés, Javier and Lopez-Salido, David and Vallés, Javier, Money in an Estimated Business Cycle Model of the Euro Area. Economic Journal, Vol. 116, No. 511, pp. 457-477, April 2006. Available at SSRN: https://ssrn.com/abstract=894513 or http://dx.doi.org/10.1111/j.1468-0297.2006.01088.x

Javier Andrés (Contact Author)

University of Valencia - Department of Economics ( email )

E-46022 Valencia, Valencia E-46022
Spain
(34 96) 382 8260 (Phone)
(34 96) 382 8249 (Fax)

David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Javier Vallés

Government of the Kingdom of Spain - Economic Bureau of the President ( email )

28071 Madrid
Spain

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