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Data uncertainty and the role of money as an information variable for monetary policy

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Author Info
Andrew T. Levin (Board of Governors of the Federal Reserve System, 20th and C Streets, NW, Washington, DC 20551, United States.)
Gunter Coenen () (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)
Volker Wieland (University of Frankfurt, P.O. Box 94, Mertonstrasse 17, D-60054 Frankfurt am Main, Germany.)

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Abstract

In this study, we perform a quantitative assessment of the role of money as an indicator variable for monetary policy in the euro area. We document the magnitude of revisions to euro area-wide data on output, prices, and money, and find that monetary aggregates have a potentially significant role in providing information about current real output. We then proceed to analyze the information content of money in a forward-looking model in which monetary policy is optimally determined subject to incomplete information about the true state of the economy. We show that monetary aggregates may have substantial information content in an environment with high variability of output measurement errors, low variability of money demand shocks, and a strong contemporaneous linkage between money demand and real output. As a practical matter, however, we conclude that money has fairly limited information content as an indicator of contemporaneous aggregate demand in the euro area. JEL Classification: E31; E52; E58; E61.

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Paper provided by European Central Bank in its series Working Paper Series with number 084.

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Length: 64 pages
Date of creation: Nov 2001
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Handle: RePEc:ecb:ecbwps:20010084

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Related research
Keywords: Euro area; Kalman filter; measurement error; monetary policy rules; rational expectations.;

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References listed on IDEAS
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  2. Gunter Coenen & Volker Wieland, 2000. "A Small Estimated Euro-Area Model with Rational Expectations and Nominal Rigidities," Econometric Society World Congress 2000 Contributed Papers 1284, Econometric Society. [Downloadable!]
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  25. Athanasios Orphanides & Volker Wieland, 1998. "Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero," Finance and Economics Discussion Series 1998-35, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  30. Laurence H. Meyer & Eric T. Swanson & Volker W. Wieland, 2001. "NAIRU Uncertainty and Nonlinear Policy Rules," American Economic Review, American Economic Association, vol. 91(2), pages 226-231, May. [Downloadable!] (restricted)
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