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Monetary Misperceptions, Output and Inflation Dynamics

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  • Collard, Fabrice
  • Dellas, Harris

Abstract

We revisit the contribution of misperceived money to business cycles, and in particular to the inertial dynamics of inflation following a monetary policy shock. We establish three things. First, the difference between preliminary and revised money data captures monetary misperceptions well. Second, misperceived money is quantitatively substantial and also matters significantly for economic activity. And third, imperfect information about monetary aggregates can help the standard NK model exhibit inertial inflation dynamics.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7644.

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Date of creation: Jan 2010
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Handle: RePEc:cpr:ceprdp:7644

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Keywords: inflation inertia; measurement error; Monetary misperceptions;

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References

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  1. Stanley Fischer, 1980. "Rational Expectations and Economic Policy," NBER Books, National Bureau of Economic Research, Inc, number fisc80-1.
  2. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research, National Bank of Belgium 109, National Bank of Belgium.
  3. Robert J. Barro & Mark Rush, 1980. "Unanticipated Money and Economic Activity," NBER Chapters, in: Rational Expectations and Economic Policy, pages 23-73 National Bureau of Economic Research, Inc.
  4. King, Robert G., 1981. "Monetary information and monetary neutrality," Journal of Monetary Economics, Elsevier, Elsevier, vol. 7(2), pages 195-206.
  5. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(1), pages 191-205, February.
  6. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting "M" back in monetary policy," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 761, Board of Governors of the Federal Reserve System (U.S.).
  7. Olivier Coibion & Yuriy Gorodnichenko, 2010. "Strategic Interaction among Heterogeneous Price-Setters in an Estimated DSGE Model," Working Papers, Department of Economics, College of William and Mary 93, Department of Economics, College of William and Mary.
  8. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  9. James Bullard & Stefano Eusepi, 2005. "Did the Great Inflation Occur Despite Policymaker Commitment to a Taylor Rule?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 324-359, April.
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  12. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(4), pages 1295-1328, November.
  13. Dellas, Harris, 2006. "Monetary Shocks and Inflation Dynamics in the New Keynesian Model," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(2), pages 543-551, March.
  14. John F. Boschen & Herschel I. Grossman, 1981. "Tests of Equilibrium Macroeconomics Using Contemporaneous Monetary Data," NBER Working Papers 0558, National Bureau of Economic Research, Inc.
  15. Norman R. Swanson & Jeffery D. Amato, 2000. "The real-time predictive content of money for output," BIS Working Papers 96, Bank for International Settlements.
  16. Knut Anton Mork, 1990. "Forecastable Money-Growth Revisions: A Closer Look at the Data," Canadian Journal of Economics, Canadian Economics Association, vol. 23(3), pages 593-616, August.
  17. Jon Faust & John H. Rogers & Jonathan H. Wright, 2000. "News and noise in G-7 GDP announcements," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 690, Board of Governors of the Federal Reserve System (U.S.).
  18. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 2(2), pages 221-235, April.
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  20. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(3), pages 665-690, April.
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Citations

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Cited by:
  1. Baxter, Brad & Graham, Liam & Wright, Stephen, 2011. "Invertible and non-invertible information sets in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 35(3), pages 295-311, March.
  2. Givens, Gregory & Salemi, Michael, 2012. "Inferring monetary policy objectives with a partially observed state," MPRA Paper 39353, University Library of Munich, Germany.
  3. Fabrice Collard & Harris Dellas & Frank Smets, 2009. "Imperfect Information and the Business Cycle," School of Economics Working Papers 2009-15, University of Adelaide, School of Economics.

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