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Money in monetary policy design under uncertainty: A formal characterization of ECB-style cross-checking

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  • Beck, Günter W.
  • Wieland, Volker

Abstract

The European Central Bank has assigned a special role to money in its two pillar strategy and has received much criticism for this decision. The case against including money in the central bank’s interest rate rule is based on a standard model of the monetary transmission process that underlies many contributions to research on monetary policy in the last two decades. In this paper, we develop a justification for including money in the interest rate rule by allowing for imperfect knowledge regarding unobservables such as potential output and equilibrium interest rates. We formulate a novel characterization of ECB-style monetary cross-checking and show that it can generate substantial stabilization benefits in the event of persistent policy misperceptions regarding potential output. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2007/18.

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Date of creation: 2006
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Handle: RePEc:zbw:cfswop:200718

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Related research

Keywords: Monetary Policy; Money; Quantity Theory; Phillips Curve; European Central Bank; Policy Under Uncertainty;

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  1. Stefan Gerlach, 2004. "The two pillars of the European Central Bank," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 19(40), pages 389-439, October.
  2. Beck, Günter W. & Wieland, Volker, 2006. "Money in monetary policy design under uncertainty: The two-pillar Phillips curve versus ECB-style cross-checking," CFS Working Paper Series, Center for Financial Studies (CFS) 2007/17, Center for Financial Studies (CFS).
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