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

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  • 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. --

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Bibliographic Info

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

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Date of creation: 2008
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Handle: RePEc:zbw:cfswop:200825

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

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Citations

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Cited by:
  1. Barthélemy, J. & Clerc L. & Marx, M., 2008. "A Two-Pillar DSGE Monetary Policy Model for the Euro Area," Working papers 219, Banque de France.
  2. Schmidt, Sebastian & Wieland, Volker, 2013. "The New Keynesian Approach to Dynamic General Equilibrium Modeling: Models, Methods and Macroeconomic Policy Evaluation," Handbook of Computable General Equilibrium Modeling, Elsevier.
  3. Bursian, Dirk & Roth, Markus, 2013. "Optimal policy and taylor rule cross-checking under parameter uncertainty," SAFE Working Paper Series 30, Center of Excellence SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  4. Alfred A. Haug & William G. Dewald, 2010. "Money, Output and Inflation in the Longer Term: Major Industrial Countries, 1880-2001," Working Papers 1013, University of Otago, Department of Economics, revised Sep 2010.
  5. Wieland, Volker & Beck, Günter W., 2010. "Money in monetary policy design: Monetary cross-checking in the New-Keynesian model," Working Paper Series 1191, European Central Bank.
  6. Issing, Otmar, 2011. "Lessons for monetary policy: What should the consensus be?," CFS Working Paper Series 2011/13, Center for Financial Studies (CFS).
  7. 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).
  8. 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, vol. 34(2), pages 326-341.
  9. 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.
  10. Otmar Issing, 2011. "Lessons for monetary policy: what should the consensus be?," Globalization and Monetary Policy Institute Working Paper 81, Federal Reserve Bank of Dallas.
  11. Athanasios Orphanides, 2010. "Monetary Policy Lessons from the Crisis," Working Papers 2010-1, Central Bank of Cyprus.
  12. Helge Berger & Henning Weber, 2012. "Money as Indicator for the Natural Rate of Interest," IMF Working Papers 12/6, International Monetary Fund.
  13. Orphanides, Athanasios & Wieland, Volker, 2012. "Complexity and Monetary Policy," CEPR Discussion Papers 9107, C.E.P.R. Discussion Papers.
  14. 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.
  15. Matteo Barigozzi & Antonio Conti, 2013. "On the Stability of Euro Area Money Demand and its Implications for Monetary Policy," LEM Papers Series 2013/11, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

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