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Information Variables for Monetary Policy in a Small Structural Model of the Euro Area

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  • Lippi, Francesco
  • Neri, Stefano

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 costs indicator, which contains information that helps to reduce the volatility of the output gap. Finally, the estimated weights for the objectives of monetary policy indicate that considerable importance is attributed to interest-rate smoothing, greater than the importance attributed to the output gap stabilization. This finding indicates that the welfare gains of commitment may be smaller than is suggested by typical parameterizations of New-Keynesian models.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4125.

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Date of creation: Dec 2003
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Handle: RePEc:cpr:ceprdp:4125

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

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References

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Citations

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Cited by:
  1. 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).
  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. Salvatore Nisticò, 2012. "Monetary Policy and Stock-Price Dynamics in a DSGE Framework," CSEF Working Papers 307, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  4. 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.
  5. Sophocles N. Brissimis & Nicholas S. Magginas, 2006. "Monetary Policy Rules under Heterogeneous Inflation Expectations," Working Papers 35, Bank of Greece.
  6. Nimark, Kristoffer P., 2003. "Indicator Accuracy and Monetary Policy: Is Ignorance Bliss?," Working Paper Series 157, Sveriges Riksbank (Central Bank of Sweden).
  7. 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.
  8. Helge Berger & Henning Weber, 2012. "Money As Indicator for the Natural Rate of Interest," IMF Working Papers 12/6, International Monetary Fund.
  9. Frederick van der Ploeg, 2007. "Prudent Monetary Policy and Cautious Prediction of the Output Gap," Economics Working Papers ECO2007/40, European University Institute.
  10. 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.
  11. Pablo García, & Rodrigo O. Valdés, 2004. "Monetarism Beyond M1A," Working Papers Central Bank of Chile 262, Central Bank of Chile.

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