This paper estimates an enriched version of the mainstream medium-scale dynamic stochastic general equilibrium model, which features nonseparability between consumption and real money balances in utility and a systematic response of the policy rate to money growth. Estimation results show that money is a significant factor in the monetary policy rule. As a consequence, econometric analysis that omits money from Taylor rules may lead to biased estimates of the model parameters. In contrast to earlier studies that rely on small-scale models, the paper stresses the merits of using a sufficiently rich model. First, it delivers different results, such as the role of nonseparability between consumption and money in utility. Second, the rich dynamics embedded in the model allow us to explore the responses of a larger set of macroeconomic variables, making the model more informative on the effects of shocks and more useful for understanding the sources of business cycles. Third and most importantly, it reveals the possible pitfalls of relying on small-scale models when studying money’s role in business cycles.

In this paper, we analyze the effects of the stimulus packages adopted by the German government during the Great Recession. We employ a standard medium-scale dynamic stochastic general equilibrium (DSGE) model extended by non-optimizing households and a detailed fiscal sector. In particular, the dynamics of spending and revenue variables are modeled as feedback rules with respect to the cyclical components of output, hours worked and private investment. Based on the estimated rules, fiscal shocks are identified. According to the results, fiscal policy, in particular public consumption, investment, and transfers prevented a sharper and prolonged decline of German output at the beginning of the Great Recession, suggesting a timely response of fiscal policy. The overall effects, however, are small when compared to other domestic and international shocks that contributed to the economic downturn. Our overall findings are not sensitive to considering fiscal foresight.

This paper proposes a New Keynesian dynamic stochastic general equilibrium model of the Chinese economy incorporating the demand of oil to study the effects of oil price shocks on the business cycle. The model answers several questions, including how monetary policy should respond to the disturbances from such shocks, and whether monetary authorities should use core inflation or headline inflation including oil price inflation as the monetary policy rule. The contributions could be summarized as follows: First, the model reveals that the oil transmission mechanism is determined by the nominal inertia, income effect, and the portfolio allocation effect. Second, both noncore inflation monetary policy and core inflation monetary policy that are simultaneously pegged to oil prices fluctuations are inferior to the monetary policy purely pegged to core inflation. Our findings suggest that the monetary policy should focus on core inflation instead of headline inflation.

In this paper, we compare the empirical properties of closed- and open-economy DSGE models estimated on Euro area data. The comparison is made along several dimensions; we examine the models in terms of their marginal likelihoods, forecasting performance, variance decompositions, and their transmission mechanisms of monetary policy.