Advanced Search
MyIDEAS: Login to save this paper or follow this series

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

Contents:

Author Info

  • Beck, Günter W.
  • Wieland, Volker

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. --

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://econstor.eu/bitstream/10419/25560/1/577765094.PDF
Download Restriction: no

Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2008/25.

as in new window
Length:
Date of creation: 2008
Date of revision:
Handle: RePEc:zbw:cfswop:200825

Contact details of provider:
Postal: House of Finance, Grüneburgplatz 1, HPF H5, D-60323 Frankfurt am Main
Phone: +49 (0)69 798-30050
Fax: +49 (0)69 798-30077
Email:
Web page: http://www.ifk-cfs.de/
More information through EDIRC

Related research

Keywords: Taylor Rules; Money; Quantity Theory; Output Gap Uncertainty; Monetary Policy Under Uncertainty;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Svensson, Lars E. O. & Woodford, Michael, 2003. "Indicator variables for optimal policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(3), pages 691-720, April.
  2. Volker Wieland, . "Monetary Policy and Uncertainty about the Natural Unemployment Rate," Computing in Economics and Finance 1997, Society for Computational Economics 11, Society for Computational Economics.
  3. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2008. "Interpreting euro area inflation at high and low frequencies," European Economic Review, Elsevier, Elsevier, vol. 52(6), pages 964-986, August.
  4. Athanasios Orphanides & Simon van Norden, 2001. "The Unreliability of Output Gap Estimates in Real Time," CIRANO Working Papers, CIRANO 2001s-57, CIRANO.
  5. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
  6. Coenen, Guenter & Levin, Andrew & Wieland, Volker, 2003. "Data Uncertainty and the Role of Money as an Information Variable for Monetary Policy," CFS Working Paper Series 2003/07, Center for Financial Studies (CFS).
  7. William Kerr & Robert G. King, 1996. "Limits on interest rate rules in the IS model," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Spr, pages 47-75.
  8. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers, C.V. Starr Center for Applied Economics, New York University 99-13, C.V. Starr Center for Applied Economics, New York University.
  9. Marvin Goodfriend & Robert King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296 National Bureau of Economic Research, Inc.
  10. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(5), pages 947-985, October.
  11. Orphanides, Athanasios, 1999. "The Quest for Prosperity Without Inflation," Working Paper Series 93, Sveriges Riksbank (Central Bank of Sweden).
  12. John H. Kalchbrenner & Peter A. Tinsley & James Berry & Bonnie Garrett, 1978. "On filtering auxiliary information in short-run monetary policy," Special Studies Papers, Board of Governors of the Federal Reserve System (U.S.) 108, Board of Governors of the Federal Reserve System (U.S.).
  13. Lars E O Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Bank of England working papers, Bank of England 56, Bank of England.
  14. Svensson, Lars E. O. & Woodford, Michael, 2001. "Indicator Variables for Optimal Policy under Asymmetric Information," Seminar Papers, Stockholm University, Institute for International Economic Studies 689, Stockholm University, Institute for International Economic Studies.
  15. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  16. Peter N. Ireland, 2001. "Money's Role in the Monetary Business Cycle," NBER Working Papers 8115, National Bureau of Economic Research, Inc.
  17. Javier Andrés & J. David López-Salido & Javier Vallés, 2006. "Money in an Estimated Business Cycle Model of the Euro Area," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 116(511), pages 457-477, 04.
  18. Gerberding, Christina & Seitz, Franz & Worms, Andreas, 2005. "How the Bundesbank really conducted monetary policy," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 16(3), pages 277-292, December.
  19. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 47(5), pages 1267-86, September.
  20. Walsh, Carl E, 2004. "Robustly Optimal Instrument Rules and Robust Control: An Equivalence Result," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(6), pages 1105-13, December.
  21. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  22. Wieland, Volker, 2000. "Learning by doing and the value of optimal experimentation," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 24(4), pages 501-534, April.
  23. Orphanides, Athanasios & Porter, Richard D., 2000. "P revisited: money-based inflation forecasts with a changing equilibrium velocity," Journal of Economics and Business, Elsevier, Elsevier, vol. 52(1-2), pages 87-100.
  24. Andrew C. Harvey, 1990. "The Econometric Analysis of Time Series, 2nd Edition," MIT Press Books, The MIT Press, The MIT Press, edition 2, volume 1, number 026208189x, December.
  25. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  26. Benati, Luca, 2009. "Long run evidence on money growth and inflation," Working Paper Series, European Central Bank 1027, European Central Bank.
  27. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, The MIT Press, edition 2, volume 1, number 0262232316, December.
  28. Orphanides, Athanasios & Wieland, Volker, 1999. "Inflation zone targeting," Working Paper Series, European Central Bank 0008, European Central Bank.
  29. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series, European Central Bank 0955, European Central Bank.
  30. 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.
  31. Beck, Günter & Wieland, Volker, 2007. "Money in Monetary Policy Design: A Formal Characterization of ECB-Style Cross-Checking," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6097, C.E.P.R. Discussion Papers.
  32. Reynard, Samuel, 2004. "Financial market participation and the apparent instability of money demand," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(6), pages 1297-1317, September.
  33. Beck, Gunter W. & Wieland, Volker, 2002. "Learning and control in a changing economic environment," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 26(9-10), pages 1359-1377, August.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Roth, Markus & Bursian, Dirk, 2012. "Taylor rule cross-checking and selective monetary policy adjustment," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62078, Verein für Socialpolitik / German Economic Association.
  2. Otmar Issing, 2011. "Lessons for monetary policy: what should the consensus be?," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 81, Federal Reserve Bank of Dallas.
  3. Beck, Guenter W. & Wieland, Volker, 2009. "Money in monetary policy design: Monetary cross-checking in the New-Keynesian Model," CFS Working Paper Series 2009/19, Center for Financial Studies (CFS).
  4. Schmidt, Sebastian & Wieland, Volker, 2012. "The new keynesian approach to dynamic general equilibrium modeling: Models, methods, and macroeconomic policy evaluation," IMFS Working Paper Series 52, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  5. Bursian, Dirk & Roth, Markus, 2013. "Optimal policy and taylor rule cross-checking under parameter uncertainty," SAFE Working Paper Series 30, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  6. Barthélemy, J. & Clerc L. & Marx, M., 2008. "A Two-Pillar DSGE Monetary Policy Model for the Euro Area," Working papers, Banque de France 219, Banque de France.
  7. Matteo Barigozzi & Antonio Conti, 2013. "On the Stability of Euro Area Money Demand and its Implications for Monetary Policy," LEM Papers Series, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy 2013/11, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  8. Orphanides, Athanasios & Wieland, Volker, 2012. "Complexity and monetary policy," CFS Working Paper Series 2012/11, Center for Financial Studies (CFS).
  9. Orphanides, Athanasios, 2010. "Monetary Policy Lessons from the Crisis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7891, C.E.P.R. Discussion Papers.
  10. Bletzinger, Tilman & Wieland, Volker, 2013. "Estimating the European Central Bank's "Extended Period of Time"," IMFS Working Paper Series 74, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  11. Seitz, Franz & Schmidt, Markus A., 2014. "Money in modern macro models: A review of the arguments," OTH im Dialog: Weidener Diskussionspapiere 37, University of Applied Sciences Amberg-Weiden (OTH).
  12. Alfred A. Haug & William G. Dewald, 2010. "Money, Output and Inflation in the Longer Term: Major Industrial Countries, 1880-2001," Working Papers, University of Otago, Department of Economics 1013, University of Otago, Department of Economics, revised Sep 2010.
  13. Helge Berger & Henning Weber, 2012. "Money As Indicator for the Natural Rate of Interest," IMF Working Papers 12/6, International Monetary Fund.
  14. Chevapatrakul, Thanaset & Kim, Tae-Hwan & Mizen, Paul, 2012. "Monetary information and monetary policy decisions: Evidence from the euroarea and the UK," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(2), pages 326-341.
  15. Issing, Otmar, 2011. "Lessons for monetary policy: What should the consensus be?," CFS Working Paper Series 2011/13, Center for Financial Studies (CFS).
  16. Jens Boysen-Hogrefe, 2014. "Monetary aggregates to improve early output gap estimates in the euro area - an empirical assessment," Kiel Working Papers 1908, Kiel Institute for the World Economy.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:zbw:cfswop:200825. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.