Money, Interest, and Policy: Dynamic General Equilibrium in a Non-Ricardian World

Money, Interest, and Policy: Dynamic General Equilibrium in a Non-Ricardian World
ISBN-10
0262026139
ISBN-13
9780262026130
Category
Equilibrium (Economics)
Pages
215
Language
English
Published
2007
Publisher
MIT Press
Author
Jean-Pascal Bénassy

Description

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.

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