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Money as an indicator variable for monetary policy when money demand is forward looking

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  • Kajanoja, Lauri

    (Bank of Finland Research)

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    Abstract

    This paper studies the gain from using money as an indicator when monetary policy in made under data uncertainty. We use a forward and backward looking model, calibrated for the euro area. The policymaker cannot completely observe the state of the economy. Money reveals some of the private sector’s information to the policymaker, especially if there is a forward looking element in money demand. We show that observing money can considerably reduce the loss that is due to incomplete information. However, taking also into account other financial market data could decrease the marginal importance of money as an indicator.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0309.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 9/2003.

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    Length: 38 pages
    Date of creation: 09 Apr 2003
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2003_009

    Contact details of provider:
    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Related research

    Keywords: monetary policy; partial information; money; monetary aggregates; euro area;

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    1. Keith Cuthbertson & Mark P. Taylor, 1990. "Money demand, expectations, and the forward-looking model," Proceedings, Federal Reserve Bank of Cleveland, pages 289-324.
    2. Rudebusch, G.D. & Svensson, L.E.O., 1998. "Policy Rules for Inflation Targeting," Papers 637, Stockholm - International Economic Studies.
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    7. Coenen, Gunter & Levin, Andrew & Wieland, Volker, 2005. "Data uncertainty and the role of money as an information variable for monetary policy," European Economic Review, Elsevier, vol. 49(4), pages 975-1006, May.
    8. Henrik Jensen, . "Targeting Nominal Income Growth or Inflation?," EPRU Working Paper Series 99-23, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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    21. repec:fth:bfsefi:e13 is not listed on IDEAS
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    Cited by:
    1. Bukhari, Syed Kalim Hyder & Abdul, Jalil & Rao, Nasir Hamid, 2011. "Detection and Forecasting of Islamic Calendar Effects in Time Series Data: Revisited," MPRA Paper 31124, University Library of Munich, Germany.
    2. Gerberding, Christina & Seitz, Franz & Worms, Andreas, 2007. "Money-based interest rate rules: lessons from German data," Discussion Paper Series 1: Economic Studies 2007,06, Deutsche Bundesbank, Research Centre.
    3. Lippi, Francesco & Neri, Stefano, 2003. "Information Variables for Monetary Policy in a Small Structural Model of the Euro Area," CEPR Discussion Papers 4125, C.E.P.R. Discussion Papers.
    4. Yang, Zan & Wang, Songtao & Campbell, Robert, 2010. "Monetary policy and regional price boom in Sweden," Journal of Policy Modeling, Elsevier, vol. 32(6), pages 865-879, November.
    5. Duca, John V. & VanHoose, David D., 2004. "Recent developments in understanding the demand for money," Journal of Economics and Business, Elsevier, vol. 56(4), pages 247-272.

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