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Money and the natural rate of interest: Structural estimates for the United States and the euro area

  • Andrés, Javier
  • David López-Salido, J.
  • Nelson, Edward

We examine the role of money in three environments: the New Keynesian model with separable utility and static money demand; a nonseparable utility variant with habit formation; and a version with adjustment costs for holding real balances. The last two variants imply forward-looking behavior of real money balances, with forecasts of future interest rates entering current portfolio decisions. We conduct a structural econometric analysis of the U.S. and euro area economies. FIML estimates confirm the forward-looking character of money demand. A consequence is that real money balances are valuable in anticipating future variations in the natural interest rate.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 3 (March)
Pages: 758-776

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Handle: RePEc:eee:dyncon:v:33:y:2009:i:3:p:758-776
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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