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On the Relevance of Monetary Aggregates in Monetary Policy Models

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Author Info
Feldkord, Eva-Ulrike
Abstract

This paper develops a business cycle model with a financial intermediation sector. Financial wealth is defined as a predetermined state variable. Both, the additional sector of financial intermediaries and predetermination of financial wealth, affect the demand for real financial wealth. If real financial wealth also enters the monetary policy rule, the conditions for stability and uniqueness of the macroeconomic equilibrium path change fundamentally compared to standard New Keynesian business cycle models. Here, real financial wealth is interpreted as a real broad monetary aggregate. Furthermore, different interest rate rules and their consequences for stability and uniqueness of the macroeconomic equilibrium path are considered. Two monetary policy rules are found to be feasible - i.e. if these monetary policy rules are applied there exists a stable and unique macroeconomic equilibrium path. Simulations of the model showed that the monetary policy rule considering inflation and broad money as indicators is optimal.

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Paper provided by Hamburg Institute of International Economics in its series Discussion Paper Series with number 26343.

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Date of creation: 2005
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Handle: RePEc:ags:hiiedp:26343

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Keywords: broad money; macroeconomic stability; monetary policy.; Financial Economics; E41; E51; E52;

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