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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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  • Javier Andrés

    ()
    (Universidad de Valencia)

  • David López-Salido

    ()
    (Federal Reserve Board)

  • Edward Nelson

    ()
    (Federal Reserve Bank of St. Louis)

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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File Function: First version, March 2008
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0805.

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Length: 50 pages
Date of creation: Mar 2008
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Handle: RePEc:bde:wpaper:0805

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Keywords: Money; natural rate; New Keynesian models;

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