Banking and the role of money in the business cycle |
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| Authors: | Francesco Zanetti |
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| Institution: | 1. tpalivos@uom.gr;2. eodoug@lsu.edu;3. CPapageorgiou@imf.org;1. Research Department, Financial Stability Wing, Norges Bank (Central Bank of Norway), Bankplassen 2, P.O. Box 1179 Sentrum, 0107 Oslo, Norway;2. Market Infrastructure Division, Financial Stability, Bank of England, Threadneedle Street, London EC2R 8AH, United Kingdom;1. Institute of Veterinary Science, University of Liverpool, Leahurst Campus, Chester High Road, Neston, CH64 7TE, UK;2. Institute of Infection and Global Health, University of Liverpool, Leahurst Campus, Chester High Road, Neston, CH64 7TE, UK |
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| Abstract: | This paper enriches a standard New Keynesian model with a simple banking sector to investigate the role of money in the business cycle. Maximum likelihood estimation of the model suggests that money balances play a significant role in explaining the intertemporal allocation of consumption and the dynamics of inflation as described by the forward-looking IS and Phillips curves. Nonetheless, the responses of the model’s variables to shocks remain qualitatively similar to a model without money, suggesting that the omission of money balances leaves the model’s transmission mechanism unaffected. |
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