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Central bank misperceptions and the role of money in interest rate rules

Author

Listed:
  • Guenter Beck

    (Johann Wolfgang Goethe University Frankfurt)

  • Volker Wieland

    (Johann Wolfgang Goethe University Frankfurt
    CEPR)

Abstract

Research with Keynesian-style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant. Critics, however, have argued that these models need to be modified to account for observed money growth and inflation trends, and that monetary trends may serve as a useful cross-check for monetary policy. We identify an important source of monetary trends in form of persistent central bank misperceptions regarding potential output. Simulations with historical output gap estimates indicate that such misperceptions may induce persistent errors in monetary policy and sustained trends in money growth and inflation. If interest rate prescriptions derived from Keynesian-style models are augmented with a cross-check against money-based estimates of trend inflation, inflation control is improved substantially.

Suggested Citation

  • Guenter Beck & Volker Wieland, 2008. "Central bank misperceptions and the role of money in interest rate rules," Working Paper Research 147, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:200810-22
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    More about this item

    Keywords

    monetary policy under uncertainty; money; output gap uncertainty; quantity theory and Taylor rules;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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