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This paper analyzes the role of money and monetary policy as well as the forecasting performance of New Keynesian dynamic stochastic general equilibrium models with and without separability between consumption and money. The study is conducted over three crisis periods in the Eurozone, namely, the ERM crisis, the dot-com crisis, and the global financial crisis (GFC). The results of successive Bayesian estimations demonstrate that during these crises, the nonseparable model generally provides better out-of-sample output forecasts than the baseline model. We also demonstrate that money shocks have some impact on output variations during crises, especially in the case of the GFC. Furthermore, the response of output to a money shock is more persistent during the GFC than during the other crises. The impact of monetary policy also changes during crises. Insofar as the GFC is concerned, this impact increases at the beginning of the crisis, but decreases sharply thereafter.

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This study examines how money and monetary policy have in‡uenced output and in ‡ation during the past decade in Israel by comparing two New Keynesian DSGE models. One is a baseline separable model (Galí, 2008) and the other assumes non-separable household preferences between consumption and money (Benchimol and Fourçans, 2012). We test both models by using rolling window Bayesian estimations over the last decade (2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013). The results of the presented dynamic analysis show that the sensitivity of output with respect to money shocks increased during the Dot-com, Intifada, and Subprime crises. The role of monetary policy increased during these crises, especially with regard to in ‡ation, even though the effectiveness of conventional monetary policy decreased during the Subprime crisis. In addition, the non-separable model including money provides lower forecast errors than the baseline separable model without money, while the in ‡uence of money on output ‡uctuations can be seen as a good predictive indicator of bank and debt risks. By impacting and monitoring households'money holdings, policy makers could improve their forecasts and crisis management through models considering monetary aggregates.

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