Working Paper: CEPR ID: DP6813
Authors: Matthew B. Canzoneri; Robert Cumby; Behzad Diba; J. David López-Salido
Abstract: Woodford (2003) describes a popular class of neo-Wicksellian models in which monetary policy is characterized by an interest-rate rule, and the money market and financial institutions are typically not even modelled. Critics contend that these models are incomplete and unsuitable for monetary-policy evaluation. Our Banks and Bonds model starts with a standard neo-Wicksellian model and then adds banks and a role for bonds in the liquidity management of households and banks. The Banks and Bonds model gives a more complete description of the economy, but the neo-Wicksellian model has the virtue of simplicity. Our purpose here is to see if the neo-Wicksellian model gives a reasonably accurate account of macroeconomic behaviour in the more complete Banks and Bonds model. We do this by comparing the models? second moments, variance decompositions and impulse response functions. We also study the role of monetary aggregates and velocity in predicting inflation in the two models.
Keywords: banks; monetary aggregates
JEL Codes: E51; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| BB model (Y20) | more complete description of the economy (E39) |
| government bonds (H63) | liquidity buffers (E41) |
| liquidity buffers (E41) | spread between CCAPM rate and government bond rate (E43) |
| monetary policy shocks (E39) | aggregate demand (E00) |
| fiscal policy actions (E62) | inflation outcomes (E31) |
| government spending shocks (E62) | inflation variation (E31) |
| monetary aggregates (E19) | indicators of inflation (E31) |
| NW model (C59) | inadequate capture of monetary policy transmission mechanisms (E50) |