Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-11T16:38:15.374Z Has data issue: false hasContentIssue false
  • English
  • Français

INSIDE MONEY IN GENERAL EQUILIBRIUM: DOES IT MATTER FOR MONETARY POLICY?

Published online by Cambridge University Press:  17 November 2011

Livio Stracca
Livio Stracca*
Affiliation:
European Central Bank
*
Address correspondence to: Livio Stracca, European Central Bank, Kaiserstrasse 29, 60323 Frankfurt am Main, Germany; e-mail: livio.stracca@ecb.int.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper analyzes the role and importance of “inside” money, made out of commercial banks' liabilities, for a New Keynesian model of the type commonly used for monetary policy analysis. The active role of inside money stems from its unique role in allowing payment for at least some consumption goods; shocks to the production of inside money may therefore have real effects. A calibrated version of the model is shown to generate small, but nonnegligible effects of inside money shocks on output and inflation. Moreover, the presence of inside money in the model leads to a slight attenuation of the effect of technology and monetary policy shocks. Finally, it is found that it is optimal for monetary policy to react to inside money shocks, but reacting to inflation alone does not result in a significant loss of household welfare.

Keywords

Endogenous MoneyInside MoneyMonetary PolicyDynamic General Equilibrium ModelsDeposit in Advance Constraint
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 3 , April 2013 , pp. 563 - 590
Copyright
Copyright © Cambridge University Press 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Barnett, W.A. (1980) Economic monetary aggregates: An application of index number and aggregation theory. Journal of Econometrics 14, 11–18.CrossRefGoogle Scholar
Belongia, M.T. and Ireland, P.N. (2006) The own-price of money and the channels of monetary transmission. Journal of Money, Credit and Banking 38 (2), 429–445.CrossRefGoogle Scholar
Berger, A.N., Gropp, R., Sorensen, C. Kok, and Lichtenberger, J-D. (2008) Cross-Atlantic Monetary Policy Transmission in Bank Deposit and Lending Rates. Mimeo, European Central Bank.Google Scholar
Buiter, W.H. (2007) Seignorage. NBER working paper 12919.Google Scholar
Canzoneri, M., Cumby, R., Diba, B., and Lopez-Salido, D. (2007) Monetary Aggregates and Liquidity in a Neo-Wicksellian Framework. CEPR discussion paper 6813.Google Scholar
Casares, M. and McCallum, B.T. (2000) An Optimizing IS-LM Framework with Endogenous Investment. NBER working paper 7908.CrossRefGoogle Scholar
Chari, V.V., Christiano, L.J., and Eichenbaum, M. (1995) Inside money, outside money, and short-term interest rates. Journal of Money, Credit and Banking 27, 1354–1386.CrossRefGoogle Scholar
Christiano, L., Motto, R., and Rostagno, M. (2003) The Great Depression and the Friedman–Schwartz hypothesis. Journal of Money, Credit and Banking 35 (6), 1119–1170.CrossRefGoogle Scholar
Cooley, T.F. and Quadrini, V. (1999) A neoclassical model of the Phillips curve relation. Journal of Monetary Economics 44, 165–193.CrossRefGoogle Scholar
Dedola, L. and Neri, S. (2007) What does a technology shock do? A VAR analysis with model-based sign restrictions. Journal of Monetary Economics 54, 512–549.CrossRefGoogle Scholar
Einarsson, T. and Marquis, M.H. (2001) Bank intermediation over the business cycle. Journal of Money, Credit and Banking 33 (4), 876–899.CrossRefGoogle Scholar
Ellison, M. and Scott, A. (2000) Sticky prices and volatile output. Journal of Monetary Economics 46 (3), 621–632.CrossRefGoogle Scholar
Favara, G. and Giordani, P. (2009) Reconsidering the role of money for output, prices and interest rates. Journal of Monetary Economics 56 (3), 419–430.CrossRefGoogle Scholar
Gaiotti, E. and Secchi, A. (2006) Is there a cost channel of monetary policy transmission? An investigation into the pricing behaviour of 2,000 firms. Journal of Money, Credit and Banking 38 (8), 2013–2038.CrossRefGoogle Scholar
Gali, J. (1992) How well does the IS–LM model fit postwar U.S. data? Quarterly Journal of Economics 107 (2), 709–738.CrossRefGoogle Scholar
Gambacorta, L. (2008) How do banks set interest rates? European Economic Review 52, 792–819.CrossRefGoogle Scholar
Goodfriend, M. and McCallum, B.T. (2007) Banking and interest rates in monetary policy analysis: A quantitative exploration. Journal of Monetary Economics 54 (5), 1480–1507.CrossRefGoogle Scholar
Goodhart, C.A.E. (2007) Whatever Became of the Monetary Aggregates? Peston lecture, Queen Mary College, London.CrossRefGoogle Scholar
Gross, D.B. and Soudeles, N.S. (2002) Do liquidity constraints and interest rates matter for consumer behaviour? Evidence from credit card data. Quarterly Journal of Economics 117, 149–185.CrossRefGoogle Scholar
Hafer, R.W., Haslag, J.H., and Jones, G. (2006) On money and output: Is money redundant? Journal of Monetary Economics 54 (3), 945–954.CrossRefGoogle Scholar
Hartley, P.R. (1998) Inside money as a source of investment finance. Journal of Money, Credit and Banking 30 (2), 193–217.CrossRefGoogle Scholar
Hartley, P.R. and Walsh, C. (1991) Inside money and monetary neutrality. Journal of Macroeconomics 13 (3), 395–416.CrossRefGoogle Scholar
Keen, B. and Wang, Y. (2007) What is a realistic value for price adjustment costs in New Keynesian models? Applied Economics Letters 14 (11), 789–793.CrossRefGoogle Scholar
King, R.G. and Rebelo, S. (2000) Resuscitating Real Business Cycles. NBER working paper 7534.CrossRefGoogle Scholar
Kiyotaki, N. and Moore, J. (2002) Inside Money and Liquidity. Marschak Lecture, delivered at the South Asia meeting of the Econometric Society, December.Google Scholar
Kocherlakota, N. (1998) Money is memory. Journal of Economic Theory 81, 232–251.CrossRefGoogle Scholar
Lagos, R. (2008) Inside and outside money. In Durlauf, Steven N. and Blume, Lawrence E. (eds.), The New Palgrave Dictionary of Economics (2nd ed.), pp. 15–26. Palgrave Macmillan.Google Scholar
Laidler, D. (1999) Passive money, active money, and monetary policy. Bank of Canada Review, Summer, 15–26.Google Scholar
Laidler, D. (2006) Three Lectures on Monetary Theory and Policy. Oesterreichichische Nationalbank working paper 128.Google Scholar
Leeper, E.M. and Roush, J.E. (2003) Putting “M” back in monetary policy. Journal of Money, Credit and Banking 35, 1217–1256.CrossRefGoogle Scholar
Markovic, B. (2008) Bank Capital Channels in the Monetary Transmission Mechanism. Bank of England working paper 313.Google Scholar
Nelson, E. (2002) Direct effects of base money on aggregate demand: Theory and evidence. Journal of Monetary Economics 49, 687–708.CrossRefGoogle Scholar
Nelson, E. (2003) The future of monetary aggregates in monetary policy analysis. Journal of Monetary Economics 50 (5), 1029–1059.CrossRefGoogle Scholar
Ravenna, F. and Walsh, C.E. (2006) Optimal monetary policy with the cost channel. Journal of Monetary Economics 53, 199–216.CrossRefGoogle Scholar
Rotemberg, J.J. (1982) Sticky prices in the United States. Journal of Political Economy 90, 1187–1211.CrossRefGoogle Scholar
Rotemberg, J. and Woodford, M. (1998) An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version. NBER Technical working paper 0233.CrossRefGoogle Scholar
Schmitt-Grohé, A. and Uribe, M. (2006) Optimal simple and implementable monetary and fiscal rules. Journal of Monetary Economics 54, 1702–1725.CrossRefGoogle Scholar
Stracca, L. (2007) Should We Take Inside Money Seriously? ECB working paper 841.Google Scholar
Tobin, J. (1969) A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking 1 (1), 15–29.CrossRefGoogle Scholar
von Peter, P. (2004) Asset Prices and Banking Distress: A Macroeconomic Approach. Bank for International Settlements working paper 167.Google Scholar
Woodford, M. (2006) How Important Is Money in the Conduct of Monetary Policy? Presented at the Fourth ECB Central Banking Conference, The Role of Money: Money and Monetary Policy in the Twenty-First Century, November 9/10.CrossRefGoogle Scholar