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Money and the natural rate of interest: Structural estimates for the United States and the euro area

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Author Info
Andrés, Javier
David López-Salido, J.
Nelson, Edward

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Abstract

We examine the role of money in three environments: the New Keynesian model with separable utility and static money demand; a nonseparable utility variant with habit formation; and a version with adjustment costs for holding real balances. The last two variants imply forward-looking behavior of real money balances, with forecasts of future interest rates entering current portfolio decisions. We conduct a structural econometric analysis of the U.S. and euro area economies. FIML estimates confirm the forward-looking character of money demand. A consequence is that real money balances are valuable in anticipating future variations in the natural interest rate.

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Publisher Info
Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 3 (March)
Pages: 758-776
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Handle: RePEc:eee:dyncon:v:33:y:2009:i:3:p:758-776

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Keywords: Money Natural rate New Keynesian models;

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Scharnagl, Michael & Gerberding, Christina & Seitz, Franz, 2007. "Simple interest rate rules with a role for money," Discussion Paper Series 1: Economic Studies 2007,31, Deutsche Bundesbank, Research Centre. [Downloadable!]
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