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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: [email protected].
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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

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