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Summary
Summary
An important recent advance 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 Bénassy 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 Bénassy 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, Bénassy introduces a model that synthesizes the two approaches, incorporating both infinite lives and the birth of new agents. Using this model, he considers a number of issues in monetary policy, including 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 |
Part I Ricardian and Non-Ricardian Economies | p. 1 |
1 The Ricardian Issue and the Pigou Effect | p. 3 |
1.1 Introduction | p. 3 |
1.2 The Traditional Ricardian Model | p. 3 |
1.3 Monetary Puzzles | p. 5 |
1.4 An Overlapping Generations Model | p. 9 |
1.5 The Pigou Effect | p. 12 |
1.6 Conclusions | p. 16 |
1.7 References | p. 16 |
Appendix A Government Spending | p. 17 |
Appendix B Money in the Utility Function | p. 18 |
2 Pigou Reconstructed: The Weil Model | p. 23 |
2.1 Introduction | p. 23 |
2.2 The Model | p. 24 |
2.3 The Dynamics of the Economy | p. 26 |
2.4 The Pigou Effect | p. 28 |
2.5 Intertemporal Equilibrium and a Dynamic Equation | p. 30 |
2.6 A Generalization: Decreasing Resources | p. 31 |
2.7 The Autarkic Interest Rate | p. 32 |
2.8 Conclusions | p. 34 |
2.9 References | p. 34 |
Appendix A Money in the Utility Function | p. 35 |
Appendix B Existence Conditions | p. 38 |
Appendix C Proof of Proposition 2.2 | p. 41 |
Part II Interest, Prices, and Money | p. 45 |
3 Liquidity Effects | p. 47 |
3.1 Introduction | p. 47 |
3.2 Liquidity Effects in a Simple IS-LM Model | p. 47 |
3.3 The Model and Monetary Policy | p. 49 |
3.4 Dynamic Equilibrium | p. 50 |
3.5 Liquidity Effects | p. 51 |
3.6 A Stronger Liquidity Effect | p. 53 |
3.7 The Persistence of the Liquidity Effect | p. 54 |
3.8 Conclusions | p. 56 |
3.9 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 |
4 Interest Rate Rules and Price Determinacy | p. 63 |
4.1 Introduction | p. 63 |
4.2 The Model and Policy | p. 64 |
4.3 The Dynamic Equilibrium | p. 65 |
4.4 Ricardian Economies and the Taylor Principle | p. 66 |
4.5 Determinacy under an Interest Rate Peg | p. 67 |
4.6 Taylor Rules | p. 68 |
4.7 Economic Interpretations | p. 69 |
4.8 The Taylor Principle with a Phillips Curve | p. 70 |
4.9 Generalizations | p. 73 |
4.10 Conclusions | p. 76 |
4.11 References | p. 76 |
Appendix: Interest Rate Pegging with Variable Interest Rates | p. 77 |
5 Global Determinacy | p. 79 |
5.1 Introduction | p. 79 |
5.2 The Model | p. 79 |
5.3 Ricardian Economies and the Taylor Principle | p. 82 |
5.4 Non-Ricardian Economies: Dynamics and Steady States | p. 84 |
5.5 The Financial Dominance Criterion | p. 86 |
5.6 Local Determinacy and Financial Dominance | p. 87 |
5.7 Non-Ricardian Dynamics: A Graphical Representation | p. 89 |
5.8 Global Financial Dominance | p. 90 |
5.9 Partial Financial Dominance | p. 92 |
5.10 Interest Rate Rules and Global Determinacy: Examples | p. 96 |
5.11 Conclusions | p. 98 |
5.12 References | p. 99 |
Appendix A Global Determinacy in Ricardian Economies | p. 99 |
Appendix B Global Determinacy: Equilibria of Type R | p. 100 |
Appendix C Transversality Conditions | p. 103 |
6 Fiscal Policy and Determinacy | p. 107 |
6.1 Introduction | p. 107 |
6.2 The Model | p. 108 |
6.3 The Dynamic Equations | p. 109 |
6.4 Ricardian Economies and Determinacy | p. 109 |
6.5 Local Determinacy in the Non-Ricardian Case | p. 112 |
6.6 Global Determinacy | p. 115 |
6.7 Conclusions | p. 119 |
6.8 References | p. 119 |
Part III Optimal Policy | p. 121 |
7 A Simple Framework for Policy Analysis | p. 123 |
7.1 Introduction | p. 123 |
7.2 The Model | p. 123 |
7.3 General Equilibrium Relations | p. 125 |
7.4 Optimality | p. 127 |
7.5 Optimal Policies in Walrasian Equilibrium | p. 129 |
7.6 Conclusions | p. 130 |
7.7 References | p. 131 |
8 Government Information and Policy Activism | p. 133 |
8.1 Introduction | p. 133 |
8.2 The Sargent-Wallace Argument | p. 134 |
8.3 The Model | p. 137 |
8.4 General Equilibrium Relations | p. 138 |
8.5 Preset Wages | p. 139 |
8.6 Preset Prices | p. 146 |
8.7 Conclusions | p. 149 |
8.8 References | p. 150 |
9 Fiscal Policy and Optimal Interest Rate Rules | p. 151 |
9.1 Introduction | p. 151 |
9.2 The Model | p. 152 |
9.3 General Equilibrium Relations | p. 153 |
9.4 Optimal Interest Policy: The Walrasian Case | p. 154 |
9.5 Preset Wages | p. 155 |
9.6 Preset Prices | p. 158 |
9.7 Conclusions | p. 163 |
9.8 References | p. 163 |
Appendix: Imperfect Competition and Demand Satisfaction | p. 163 |
10 Inflation and Optimal Interest Rate Rules | p. 169 |
10.1 Introduction | p. 169 |
10.2 The Model | p. 170 |
10.3 Market Equilibrium | p. 171 |
10.4 Preset Prices | p. 172 |
10.5 Inflation as a Surrogate for Shocks | p. 175 |
10.6 Variable Contract Length | p. 178 |
10.7 Conclusions | p. 182 |
References | p. 182 |
Appendix: Proofs for Chapter 10 | p. 183 |
Bibliography | p. 189 |
Index | p. 195 |