The New Keynesian Model and the Euro Area Business Cycle*

Abstract

This paper describes a New Keynesian model incorporating transactions-facilitating money and a time-to-build constraint into endogenous capital accumulation. The calibrated New Keynesian model performs almost as well as the estimated vector autoregressive model in replicating Euro area cyclical correlations between key variables such as output and inflation, although it fares less well in predicting the procyclical dynamics of nominal interest rates. The presence of a time-to-build requirement in the model helps to improve its fit to Euro area data, whereas the role of transactions-facilitating money is much less important. Impulse-response functions and a decomposition of variance complete the analysis. Copyright Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2007.

The Swings of U.S. Inflation and the Gibson Paradox

“…Second, money is a return‐dominated asset. Based on the monetary model of Casares (), let us consider the following transaction technology for a j representative household where H t ( j ) is the amount of real income required to cover the transaction costs of a household that consumes C t ( j ) and holds the amount of real money m t ( j ) = M t ( j )/ P t obtained as the ratio between the stock of nominal money M t ( j ) and the aggregate price level P t . The parameters of the transaction technology function satisfy a 0 , a 1 > 0, 0 < a 2 < 1, and 0 < λ m < 1, while is a cost‐reducing autoregressive (AR)(1) shock .…”

“…The parameters of the transaction technology function satisfy a 0 , a 1 > 0, 0 < a 2 < 1, and 0 < λ m < 1, while is a cost‐reducing autoregressive (AR)(1) shock . As a distinctive characteristic from Casares (), there is a source of externality through the effect of lagged aggregate real money, m t − 1 = M t − 1 / P t − 1 . The role of this externality is to bring endogenous inertia into money demand behavior, which is captured by the parameter λ m .…”

“…Second, money is a return-dominated asset. Based on the monetary model of Casares (2007), let us consider the following transaction technology for a j representative household (1)…”

“…The parameters of the transaction technology function satisfy a 0 , a 1 > 0, 0 < a 2 < 1, and 0 < λ m < 1, while ϵ χ t is a cost-reducing autoregressive (AR)(1) shock. 9 As a distinctive characteristic from Casares (2007), there is a source of externality through the effect of lagged aggregate real money, 8. The introduction of money through a transaction cost technology instead of a money-in-the-utility function specification used by Ireland (2003) and Canova and Ferroni (2012) is empirically motivated.…”

A Residual-Based Cointegration Test for Near Unit Root Variables

“…In empirical work, a constant or a constant and a linear trend are typically included in the empirical regression (2). As in standard cointegration analysis, this will a¤ect the limiting distribution in a straightforward manner (e.g.…”