A closed economy DSGE model with occasionally binding cash-in-advance constraints

Li, Xingchen 2020. A closed economy DSGE model with occasionally binding cash-in-advance constraints. PhD Thesis, Cardiff University. Item availability restricted.

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Abstract

his thesis is planned to investigate whether endogenously binding cash-in-advance (CIA) constraints helps to explain the persistent liquidity traps in the US since the 2008 financial crisis. It extends the theoretical general equilibrium analysis by Dixon and Pourpourides (2016) to build a closed economy DSGE model. The model is evaluated based on the calibration and is estimated by the method proposed by Guerrieri and Iacoviello (2015, 2017) using filtered data in the period of 1985Q1 to 2017Q4 for the United States. When money is the only asset, an increase in money supply followed by a technological innovation triggers a nonbinding CIA constraint, which can cause a consumption boom. The changes in the inflation rate are the main driving force for the nonbinding CIA constraints. The periods when the CIA constraint is slack follows the waves of quantitative easing policies. However, when capital and bonds are introduced, a nonbinding CIA constraint fails to generate a consumption boom. Two ways of modelling monetary policy, money growth rule and interest rate feedback rule with zero-lower bound (ZLB), are compared. Money, which serves as a safe asset, depresses output and its components. Things are even worse when the monetary policy is set via an interest rate feedback rule with ZLB as the nominal interest rate becomes the main driving force for nonbinding CIA constraints. When the ZLB already binds, an increase in money supply loses its ability to stimulate the economy and the liquidity traps are more persistent. The model when both occasionally binding CIA constraints and ZLB are included successfully matches the data, especially for the period after the 2008 global crisis. The Friedman rule is still optimal, but the monetary authority should consider subsidizing or taxing on specific sectors instead of conducting open market operations that raise the base money in the whole economy.

Item Type:	Thesis (PhD)
Date Type:	Completion
Status:	Unpublished
Schools:	Business (Including Economics)
Uncontrolled Keywords:	cash-in-advance, occasionally binding constraints, quantitative easing, liquidity traps, monetary policy, money supply.
Date of First Compliant Deposit:	16 April 2021
Date of Acceptance:	15 April 2020
Last Modified:	06 Jan 2022 02:05
URI:	https://orca.cardiff.ac.uk/id/eprint/140508

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