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Money in Monetary Policy Design: A Formal Characterization of ECB-Style Cross-Checking

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  • Beck, Günter
  • Wieland, Volker

Abstract

The European Central Bank has assigned a special role to money in its two pillar strategy and has received much criticism for this decision. The case against including money in the central bank's interest rate rule is based on a standard model of the monetary transmission process that underlies many contributions to research on monetary policy in the last two decades. In this paper, we develop a justification for including money in the interest rate rule by allowing for imperfect knowledge regarding unobservables such as potential output and equilibrium interest rates. We formulate a novel characterization of ECB-style monetary cross-checking and show that it can generate substantial stabilization benefits in the event of persistent policy misperceptions regarding potential output.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6097.

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Date of creation: Feb 2007
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Handle: RePEc:cpr:ceprdp:6097

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Keywords: European Central Bank; monetary policy; monetary policy under uncertainty; money; quantity theory;

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References

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  1. Orphanides, Athanasios & Wieland, Volker, 2000. "Inflation zone targeting," European Economic Review, Elsevier, vol. 44(7), pages 1351-1387, June.
  2. Lars E O Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Bank of England working papers 56, Bank of England.
  3. Stefan Gerlach, 2004. "The two pillars of the European Central Bank," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 19(40), pages 389-439, October.
  4. Athanasios Orphanides & Richard D. Porter & David Reifschneider & Robert Tetlow & Frederico Finan, 1999. "Errors in the measurement of the output gap and the design of monetary policy," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1999-45, Board of Governors of the Federal Reserve System (U.S.).
  5. Beck, Günter & Wieland, Volker, 2007. "Money in Monetary Policy Design under Uncertainty: The Two-Pillar Phillips Curve versus ECB-Style Cross-Checking," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6098, C.E.P.R. Discussion Papers.
  6. Gerlach, Stefan, 2003. "The ECB's Two Pillars," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3689, C.E.P.R. Discussion Papers.
  7. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2006. "Money at Low Frequencies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5868, C.E.P.R. Discussion Papers.
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