The Role of Money and Monetary Policy in Crisis Periods: The Euro Area Case • Job Talk

Abstract We study the role of money and monetary policy in crisis periods, with reference to the Eurozone. In this analysis, we compare the performance of two New Keynesian dynamic stochastic general equilibrium (DSGE) models, that is, (i) a baseline model without money and (ii) a model with money factored in. We test both models by using successive Bayesian estimations over three crisis periods, namely, the ERM crisis, the dot-com crisis, and the subprime crisis along with the beginning of the debt crisis. The results indicate that money shocks have a larger impact on output variations during crises, especially in the case of the subprime crisis. Furthermore, the response of output to a money shock is more persistent during the subprime crisis than the other crises. The impact of monetary policy also changes during crises. Insofar as the …financial crisis is concerned, this impact increases at the beginning of the crisis, but decreases sharply thereafter. Finally, the analysis demonstrates that during crises, the model with money generally provides better output forecasts than the baseline model.

Keywords: Eurozone, Money, Monetary Policy, DSGE, Crises

JEL Classi…cation: E31, E32, E51, E58