A Classical Monetary Economy: Presentation and Analysis

Bachelor Thesis from the year 2019 in the subject Economics - Finance, grade: 1,0, University of Kaiserslautern, language: English, abstract: The aim of this thesis is the presentation and analysis of a classical monetary economy. Modelling is considered over different periods, which implies a dynamic optimization problem. Under simple and comprehensible assumptions, household side and producing firms will be modelled. In the market equilibrium, interrelations and influences of different variables are presented under participation of the monetary authority. This analysis makes use of various mathematical tools, approximation methods and log-linearizations around steady states, which requires a certain level of abstraction. Thereby mathematical complexity is always kept to a minimum. The central issue is whether the price level is determined or not. Indeterminacy leads possibly to an infinite number of equilibria, which jeopardizes meaningful modelling. Hursey and Wolman (2010) lamented the fact that most monetary models involve the problem of multiple equilibria which makes it impossible to make accurate statements. The primary objective is to promote an understanding of influencing monetary policy, especially in terms of inflation rate and price level. This thesis will show how monetary policy affects different macroeconomic variables. Furthermore, the question of optimal monetary policy will be discussed. It is important to point out that modelling a monetary economy can provide meaningful information for policy decisions. In particular, the monetary authority can be advised on its decision making by the present analysis. Overall the model presented in this work is mainly based on the work of Gali (2015), and the notation used there is predominantly adopted.