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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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    References

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    1. Stefan Gerlach & Lars E.O. Svensson, 2000. "Money and Inflation in the Euro Area: A Case for Monetary Indicators?," NBER Working Papers 8025, National Bureau of Economic Research, Inc.
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    24. repec:fth:bfsefi:e13 is not listed on IDEAS
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    Cited by:
    1. 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.
    2. Nasir Hamid Rao & Syed Kalim Hyder Bukhari & Abdul Jalil, 2011. "Detection and Forecasting of Islamic Calendar Effects in Time Series Data: Revisited," Working Papers id:4290, eSocialSciences.
    3. Francesco Lippi & Stefano Neri, 2004. "Information variables for monetary policy in a small structural model of the euro area," Temi di discussione (Economic working papers) 511, Bank of Italy, Economic Research and International Relations Area.
    4. 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.
    5. 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.

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