Money and the Natural Rate of Interest: Structural Estimates for the UK, the US and the euro area
AbstractIn 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 InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4337.
Date of creation: Mar 2004
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Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-06-13 (All new papers)
- NEP-MAC-2004-06-13 (Macroeconomics)
- NEP-MON-2004-06-13 (Monetary Economics)
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