Money, Interest, and Policy

by Benassy, Jean-Pascal

• ISBN13: 9780262524933
• ISBN10: 0262524937
• Format: Paperback
• Copyright: 2008-09-30
• Publisher: Mit Pr

Summary

An important recent advancement in macroeconomics is the development of dynamic stochastic general equilibrium (DSGE) macromodels. The use of DSGE models to study monetary policy, however, has led to paradoxical and puzzling results on a number of central monetary issues including price determinacy and liquidity effects. In Money, Interest, and Policy,Jean-Pascal Benassy argues that moving from the standard DSGE models-which he calls "Ricardian" because they have the famous "Ricardian equivalence" property-to another, "non-Ricardian" model would resolve many of these issues. A Ricardian model represents a household as a homogeneous family of infinitely lived individuals, and Benassy demonstrates that a single modification-the assumption that new agents are born over time (which makes the model non-Ricardian)-can bridge the current gap between monetary intuitions and facts, on one hand, and rigorous modeling, on the other. After comparing Ricardian and non-Ricardian models, Benassy introduces a model that synthesizes the two approaches, incorporating both infinite lives and births of new agents. He applies this model to a number of issues in monetary policy, namely liquidity effects, interest rate rules and price determinacy, global determinacy, the Taylor principle, and the fiscal theory of the price level. Finally, using a simple overlapping generations model, he analyzes optimal monetary and fiscal policies, with a special emphasis on optimal interest rate rules.

Table of Contents

Introduction	p. ix
Ricardian and Non-Ricardian Economies	p. 1
The Ricardian Issue and the Pigou Effect	p. 3
Introduction	p. 3
The Traditional Ricardian Model	p. 3
Monetary Puzzles	p. 5
An Overlapping Generations Model	p. 9
The Pigou Effect	p. 12
Conclusions	p. 16
References	p. 16
Government Spending	p. 17
Money in the Utility Function	p. 18
Pigou Reconstructed: The Weil Model	p. 23
Introduction	p. 23
The Model	p. 24
The Dynamics of the Economy	p. 26
The Pigou Effect	p. 28
Intertemporal Equilibrium and a Dynamic Equation	p. 30
A Generalization: Decreasing Resources	p. 31
The Autarkic Interest Rate	p. 32
Conclusions	p. 34
References	p. 34
Money in the Utility Function	p. 35
Existence Conditions	p. 38
Proof of Proposition 2.2	p. 41
Interest, Prices, and Money	p. 45
Liquidity Effects	p. 47
Introduction	p. 47
Liquidity Effects in a Simple IS-LM Model	p. 47
The Model and Monetary Policy	p. 49
Dynamic Equilibrium	p. 50
Liquidity Effects	p. 51
A Stronger Liquidity Effect	p. 53
The Persistence of the Liquidity Effect	p. 54
Conclusions	p. 56
References	p. 56
Appendix: Proofs of Propositions 3.1 and 3.2	p. 57
Appendix: Proofs of Propositions 3.1 and 3.2	p. 57
Interest Rate Rules and Price Determinacy	p. 63
Introduction	p. 63
The Model and Policy	p. 64
The Dynamic Equilibrium	p. 65
Ricardian Economies and the Taylor Principle	p. 66
Determinacy under an Interest Rate Peg	p. 67
Taylor Rules	p. 68
Economic Interpretations	p. 69
The Taylor Principle with a Phillips Curve	p. 70
Generalizations	p. 73
Conclusions	p. 76
References	p. 76
Appendix: Interest Rate Pegging with Variable Interest Rates	p. 77
Global Determinacy	p. 79
Introduction	p. 79
The Model	p. 79
Ricardian Economies and the Taylor Principle	p. 82
Non-Ricardian Economies: Dynamics and Steady States	p. 84
The Financial Dominance Criterion	p. 86
Local Determinacy and Financial Dominance	p. 87
Non-Ricardian Dynamics: A Graphical Representation	p. 89
Global Financial Dominance	p. 90
Partial Financial Dominance	p. 92
Interest Rate Rules and Global Determinacy: Examples	p. 96
Conclusions	p. 98
References	p. 99
Global Determinacy in Ricardian Economies	p. 99
Global Determinacy: Equilibria of Type R	p. 100
Transversality Conditions	p. 103
Fiscal Policy and Determinacy	p. 107
Introduction	p. 107
The Model	p. 108
The Dynamic Equations	p. 109
Ricardian Economies and Determinacy	p. 109
Local Determinacy in the Non-Ricardian Case	p. 112
Global Determinacy	p. 115
Conclusions	p. 119
References	p. 119
Optimal Policy	p. 121
A Simple Framework for Policy Analysis	p. 123
Introduction	p. 123
The Model	p. 123
General Equilibrium Relations	p. 125
Optimality	p. 127
Optimal Policies in Walrasian Equilibrium	p. 129
Conclusions	p. 130
References	p. 131
Government Information and Policy Activism	p. 133
Introduction	p. 133
The Sargent-Wallace Argument	p. 134
The Model	p. 137
General Equilibrium Relations	p. 138
Preset Wages	p. 139
Preset Prices	p. 146
Conclusions	p. 149
References	p. 150
Fiscal Policy and Optimal Interest Rate Rules	p. 151
Introduction	p. 151
The Model	p. 152
General Equilibrium Relations	p. 153
Optimal Interest Policy: The Walrasian Case	p. 154
Preset Wages	p. 155
Preset Prices	p. 158
Conclusions	p. 163
References	p. 163
Appendix: Imperfect Competition and Demand Satisfaction	p. 163
Inflation and Optimal Interest Rate Rules	p. 169
Introduction	p. 169
The Model	p. 170
Market Equilibrium	p. 171
Preset Prices	p. 172
Inflation as a Surrogate for Shocks	p. 175
Variable Contract Length	p. 178
Conclusions	p. 182
References	p. 182
Appendix: Proofs for Chapter 10	p. 183
Bibliography	p. 189
Index	p. 195
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