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Reconsidering the Role of Money for Output, Prices and Interest Rates

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  • Favara, Giovanni

    (International Institute for Economic Studies, Stockholm University)

  • Giordani, Paolo

    ()
    (Dept. of Economics, Stockholm School of Economics)

Abstract

New Keynesian models of monetary policy assign no role to monetary aggregates, in the sense that the level of output, prices, and interest rates can be determined without knowledge of the quantity of money. We evaluate the empirical validity of this prediction by studying the effects of shocks to monetary aggregates using an identified VAR. Shocks to monetary aggregates are isolated by means of identifying restrictions suggested by this class of models. Contrary to the theoretical predictions, shocks to broad monetary aggregates have substantial and persistent effects on output and prices.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 514.

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Length: 33 pages
Date of creation: 19 Nov 2002
Date of revision:
Handle: RePEc:hhs:hastef:0514

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Keywords: New-Keynesian models; LM shocks; VAR; Block-exogeneity;

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