Money in the production function: a New Keynesian DSGE perspective

Jonathan Benchimol (1, 2, 3)

1 CES - Centre d'économie de la Sorbonne
2 Economics Department
3 TEAM - Théories et Applications en Microéconomie et Macroéconomie

This paper proposes a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model where real money balances enter the production function. By using a Bayesian analysis, our model shows that money is not an omitted input to the production process and rejects the decreasing returns to scale hypothesis. Our simulations suggest that money plays a negligible role in the dynamics of output and inflation, despite its inclusion in the production function. In addition, we introduce the flexible-price real money balances concept.

Keywords: Money in the production function; DSGE; Bayesian estimation

Domains: Humanities and Social Sciences; Economics and Finance

Jonathan Benchimol. Money in the production function: a New Keynesian DSGE perspective. 2011. ⟨hal-00800539⟩