Abstract
We construct a simple dynamic general equilibrium model to examine several important macroeconomic issues in the study. The active monetary and passive fiscal (AM/PF) policy may induce the raising of both interest rates and inflation rates. We find that there is a positive relationship between shopping time and inflation because higher inflation causes agents to reduce their money holdings so as to take more time for shopping. In addition, shopping time and output move in opposite ways due to the fact that higher shopping time results in lower working hours, so as to decrease production. Finally, this model fails to capture liquidity effect, but rather identify price puzzle through an expansion of monetary policy shock.
Highlights
In this study we examine the quantitative properties of a government which affect the implementation of economic policies in a business cycle model
In the dynamic general equilibrium model, the results of this work fail to capture liquidity effect, but rather identify price puzzle resulting from an expansion of monetary policy shock
This work builds on a simple dynamic general equilibrium model with shopping time and Calvo-type sticky price assumptions to understand a number of major macroeconomic effects and issues, using the conventional real business cycle (RBC) approach
Summary
In this study we examine the quantitative properties of a government which affect the implementation of economic policies (monetary and fiscal policy) in a business cycle model. The shopping time model is usually used to serve as a prologue to the MIU framework for the effects that money yields in terms of direct utility Such an approach is common in recent literature with regard to shopping time (see, for example, Gavin, Kydland, and Pakko, 2007). In the dynamic general equilibrium model, the results of this work fail to capture liquidity effect, but rather identify price puzzle resulting from an expansion of monetary policy shock.. In a recently study, Christiano and Eichenbaum (1995) construct a flexibleprice model to explore liquidity effect, and find decreases in nominal interest rate, accompanied by increases in employment, output and real wages in response to positive money supply shock because of cheaper money.
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