Money and risk aversion in a DSGE framework: a Bayesian application to the Euro zone

Abstract : In this paper, we set up and test a model of the Euro zone, with a special emphasis on the role of money. The model follows the New Keynesian DSGE framework, money being introduced in the utility function with a non-separability assumption. By using Bayesian estimation techniques, we shed light on the determinants of output and inflation, but also of the interest rate, real money balances, flexible-price output and flexible-price real money balances variances. The role of money is investigated further. We find that its impact on output depends on the degree of agents' risk aversion, increases with this degree, and becomes significant when risk aversion is high enough. The direct impact of the money variable on inflation variability is essentially minor whatever the risk aversion level, the interest rate (monetary policy) being the overwhelming explanatory factor.
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Jonathan Benchimol, André Fourçans. Money and risk aversion in a DSGE framework: a Bayesian application to the Euro zone. 2010. ⟨hal-00800082⟩

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