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Information variables for monetary policy in a small structural model of the euro area

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  • Francesco Lippi

    ()
    (Banca d'Italia)

  • Stefano Neri

    ()
    (Banca d'Italia)

Abstract

This paper estimates a small New-Keynesian model with imperfect information and optimal discretionary policy using data for the euro area. The model is used to assess the usefulness of monetary aggregates and unit labour costs as information variables for monetary policy. The estimates reveal that the information content of the M3 monetary aggregate is limited. A more useful role emerges for the unit labour cost indicator, which contains information on potential output that helps to reduce the volatility of the output gap. Finally, the estimated weights for the objectives of monetary policy show that considerable importance is attributed to interest-rate smoothing, greater than to output gap stabilization. This finding indicates that the welfare gains of commitment may be smaller than suggested by typical parametrizations of New-Keynesian models.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 511.

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Date of creation: Jul 2004
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Handle: RePEc:bdi:wptemi:td_511_04

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Keywords: monetary policy; Kalman filter; inflation; output gap;

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References

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Citations

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Cited by:
  1. Nimark, Kristoffer P., 2003. "Indicator Accuracy and Monetary Policy: Is Ignorance Bliss?," Working Paper Series 157, Sveriges Riksbank (Central Bank of Sweden).
  2. Lavan Mahadeva & Alex Muscatelli, 2005. "National Accounts Revisions and Output Gap Estimates in a Model of Monetary Policy with Data Uncertainty," Discussion Papers 14, Monetary Policy Committee Unit, Bank of England.
  3. Pablo García S & Rodrigo Valdés, 2003. "Dinero y Conducción de la Política Monetaria con Metas de Inflación," Economic Policy Papers Central Bank of Chile 09, Central Bank of Chile.
  4. Frederick van der Ploeg, 2007. "Prudent Monetary Policy and Cautious Prediction of the Output Gap," Economics Working Papers ECO2007/40, European University Institute.
  5. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2005. "Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through," Working Paper Series 179, Sveriges Riksbank (Central Bank of Sweden).
  6. Nisticò, Salvatore, 2012. "Monetary policy and stock-price dynamics in a DSGE framework," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 126-146.
  7. Sophocles N. Brissimis & Nicholas S. Magginas, 2006. "Monetary Policy Rules under Heterogeneous Inflation Expectations," Working Papers 35, Bank of Greece.
  8. Pablo García, & Rodrigo O. Valdés, 2004. "Monetarism Beyond M1A," Working Papers Central Bank of Chile 262, Central Bank of Chile.
  9. Helge Berger & Henning Weber, 2012. "Money As Indicator for the Natural Rate of Interest," IMF Working Papers 12/6, International Monetary Fund.
  10. van der Ploeg, Frederick, 2004. "Prudent Monetary Policy: Applications of Cautious LQG Control and Prediction," CEPR Discussion Papers 4222, C.E.P.R. Discussion Papers.
  11. Lippi, Francesco & Neri, Stefano, 2007. "Information variables for monetary policy in an estimated structural model of the euro area," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1256-1270, May.

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