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Money and the Natural Rate of Interest: Structural Estimates for the UK, the US and the euro area

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  • Andrés, Javier
  • López-Salido, J David
  • Nelson, Edward

Abstract

In this Paper, we look at the role of money in a general framework that encompasses three competing environments: the New Keynesian model with separable utility and static money demand; the non-separable utility variant with habit formation; and the New Keynesian model modified to allow for adjustment costs for holding real balances. The last two models imply a forward-looking character of real money balances that convey on money an important role as a monetary policy indicator. We distinguish between these alternative views by conducting a structural econometric analysis for the US, the euro area, and the UK. The FIML estimates confirm the forward-looking character of the money demand. Using these estimates we find that, in response to preferences and technology shocks, money incorporates useful information regarding future variations in the natural interest rate.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4337.

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Date of creation: Mar 2004
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Handle: RePEc:cpr:ceprdp:4337

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Keywords: forward-looking money demand; natural rate of interest;

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Cited by:
  1. Marco Lombardi & Silvia Sgherri, 2007. "(Un)naturally Low? Sequential Monte Carlo Tracking of the US Natural Interest Rate," DNB Working Papers 142, Netherlands Central Bank, Research Department.
  2. Berger, Helge & Österholm, Pär, 2007. "Does Money Growth Granger-Cause Inflation in the Euro Area? Evidence from Out-of-Sample Forecasts Using Bayesian VARs," Working Paper Series 2007:30, Uppsala University, Department of Economics.
  3. Berger, Helge & Stavrev, Emil, 2008. "The information content of money in forecasting Euro area inflation," Discussion Papers 2008/15, Free University Berlin, School of Business & Economics.
  4. Jeffery D. Amato, 2005. "The role of the natural rate of interest in monetary policy," BIS Working Papers 171, Bank for International Settlements.
  5. Helge Berger & Henning Weber, 2012. "Money As Indicator for the Natural Rate of Interest," IMF Working Papers 12/6, International Monetary Fund.
  6. Alexius, Annika & Welz, Peter, 2006. "Can a time-varying equilibrium real interest rate explain the excess sensitivity puzzle?," Working Paper Series 2006:20, Uppsala University, Department of Economics.

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