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Walsh, Chapter 2 MIU, Discussion comments

2.1 Introduction
To employ DSGE to explore monetary issues we need positive demand for money.
Three ways to model the demand for money (MIU, transaction costs, money used for transfer of resources).
MIU can: 1) examine relationships between money and prices, 2) examine effects of inflation on equilibrium
quantities, 3) help in choosing optimal inflation rate.
The point of doing MIU is to have a model in which people hold money in equilibrium and thus we can exploit the
effects of money on the economy.

2.2 The basic MIU model


Initially ignore the uncertainty and labor-leisure choice.
Money enters utility function as mt=Mt/(PtNt) and m is real money p.c. (often criticized approach as no intrinsic value!).
Money yields utility even if consumption is not increased (Strange! Shortcut!).
The representative household assumption.
TMB=marginal utility of consumption

2.2.1 Steady state equilibrium


Assume n=0, money growth rate = (constant), by definition b=0 as we have representative agent,
Does theta has to be constant?
Neutrality and super-neutrality of money.

2.2.2 SS with time varying money stock


Discuss equation 2.27
From 2.28 one can have k above ss level with increasing real money in equilibrium.

2.2.3 The interest elasticity of money demand


Positive function of consumption and negative of interest rates.
Many different empirical estimates of interest elasticity.
Interpret table 2.1

2.2.4 Limitations
Generate the role for money by assumption, dont know partial derivatives.

2.3 Welfare costs of inflation


Two questions, Friedman rule, main criticism.
Discuss figure 2.2 and if someone is willing to say something about pages 54-56
Two functional forms of money demand.
Is there any conclusion here?
2.4.1 Interest on money
Pay interest on money in order to avoid deflation to be optimal.
i-im =0 as optimality condition. Similar to paper I presented where im was the CB rate on reserves.

2.4.2 Non superneutrality


Introducing labor in utility function, then inflation affects real money holdings, which may affect marginal utility of
labor and thus we have real effects of inflation. But how when in ss the real money should also be fixed?
Depending on the type of utility function and interactions of money with other variables in it we will get in some cases
superneutrality and in some cases not.

2.5.1 The decision problem


Current income is no longer a part of the state because of the labor choice.
Should we say something about the statement on page 63?
If we have time and will, where does Et on page 64 comes from?

2.5.2 The steady state


Consider m=constant, prod. function CRS,
Equation 2.62 gives the influence of money on equilibrium.
o If separable preferences then no influence, if non separable then influence
Dependence on the cross derivatives.

2.5.3 The linear approximation


How do I know how many equations I need to define in order to close the model? I mean, how do we know what are
all the equations we need to put in, in order to close it, when there is just a few optimality conditions.
Any comments for pages 69-70?

2.5.4 Calibration

2.5.5 Simulation results


Persistence of monetary growth matters, a little bit perverse effects
If phi<0, if phi>0, if b>Phi, if a grandmother had a penis she would be a grandfather

2.6 Summary and conclusions