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Simple interest rate rules with a role for money

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  • Scharnagl, Michael
  • Gerberding, Christina
  • Seitz, Franz

Abstract

The paper analyses the performance of simple interest rate rules which feature a response to noisy observations of inflation, output and money growth. The analysis is based on a small empirical model of the hybrid New Keynesian type which has been estimated on euro area data by Stracca (2007). To assess the magnitude of the measurement problems regarding the feedback variables, we draw upon the real-time data set for Germany compiled by Gerberding et al. (2004). We find that interest rate rules which include a response to money growth outperform both Taylor-type rules and speed limit policies once real-time output gap uncertainty is accounted for. One reason is that targeting money growth introduces history dependence into the policy rule which is desirable when private agents are forward-looking. The second reason is that money growth contains information on the "true" growth rate of output which can only be measured imperfectly. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2007,31.

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Date of creation: 2007
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Handle: RePEc:zbw:bubdp1:6648

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Keywords: Monetary policy rules; euro area; data uncertainty;

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References

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  1. Orphanides, Athanasios, 2000. "The quest for prosperity without inflation," Working Paper Series, European Central Bank 0015, European Central Bank.
  2. Athanasios Orphanides, 2003. "Historical monetary policy analysis and the Taylor rule," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2003-36, Board of Governors of the Federal Reserve System (U.S.).
  3. Javier Andrés & David López-Salido & Edward Nelson, 2008. "Money and the natural rate of interest: structural estimates for the United States and the euro area," Banco de Espa�a Working Papers 0805, Banco de Espa�a.
  4. Hansen, Lars Peter & Sargent, Thomas J., 2003. "Robust control of forward-looking models," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(3), pages 581-604, April.
  5. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  6. Julia K. Thomas & Robert G. King, 2007. "Breaking the New Keynesian Dichotomy: Asset Market Segmentation and the Monetary Transmission Mechanism," 2007 Meeting Papers, Society for Economic Dynamics 883, Society for Economic Dynamics.
  7. Athanasios Orphanides & Richard D. Porter & David Reifschneider & Robert Tetlow & Frederico Finan, 1999. "Errors in the measurement of the output gap and the design of monetary policy," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1999-45, Board of Governors of the Federal Reserve System (U.S.).
  8. Brock,W.A. & Durlauf,S.N. & West,K.D., 2003. "Policy evaluation in uncertain economic environments," Working papers, Wisconsin Madison - Social Systems 15, Wisconsin Madison - Social Systems.
  9. Christina Gerberding & Franz Seitz & Andreas Worms, 2005. "How the Bundesbank really conducted monetary policy," Computing in Economics and Finance 2005, Society for Computational Economics 60, Society for Computational Economics.
  10. John C. Williams, 1999. "Simple rules for monetary policy," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1999-12, Board of Governors of the Federal Reserve System (U.S.).
  11. Aoki, Kosuke, 2006. "Price-Level Determination Under Dispersed Information and Monetary Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5570, C.E.P.R. Discussion Papers.
  12. Leitemo, Kai & Lonning, Ingunn, 2006. "Simple Monetary Policymaking without the Output Gap," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(6), pages 1619-1640, September.
  13. McCallum, B.T. & Nelson, E., 1998. "Nominal Income Targeting in an Open-Economy Optimizing Model," Papers, Stockholm - International Economic Studies 644, Stockholm - International Economic Studies.
  14. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  15. 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.
  16. Norman R. Swanson & Jeffery D. Amato, 2000. "The real-time predictive content of money for output," BIS Working Papers 96, Bank for International Settlements.
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Cited by:
  1. Otmar Issing, 2009. "In search of monetary stability: the evolution of monetary policy," BIS Working Papers 273, Bank for International Settlements.

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