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Title: Money in a Real Business Cycle Model

Author(s): Roger E A Farmer

Publication Date: April 1997

Keyword(s): Businesss Fluctuations, Indeterminacy and Sunspots

Programme Area(s): International Macroeconomics

Abstract: This paper constructs a real business cycle model in which real money balances yield utility. We calibrate the model to fit the first moments of US data and simulate a set of impulse response functions that are generated by the model for GDP, the rate of interest, money growth and real balances. These theoretical impulse responses are compared with actual impulse responses from US data. The model does a reasonably good job of capturing the dynamic interactions of money and real variables in US data. It differs from most existing approaches by choosing a parameterization of utility for which the model admits the existence of indeterminate equilibria. It is argued that this fact is critical in explaining the monetary propagation mechanism.

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Bibliographic Reference

Farmer, R. 1997. 'Money in a Real Business Cycle Model'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1630