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Is money informative? Evidence from a large model used for policy analysis

  • Altissimo, Filippo
  • Gaiotti, Eugenio
  • Locarno, Alberto

In this paper we assess whether monetary variables, which are observed with little delay, conveyed marginal information on the state of the Italian economy in the 1990s, taking as a benchmark the forecasting errors generated by the quarterly model used by the Bank of Italy. We follow two approaches. First we map monetary surprises into estimates of the structural disturbances using a Kalman filter approach, in order to improve the forecasts. Then we look at the sample correlations among forecasting errors in monetary and real variables, thereby taking into account links that may not be accounted for by the model�s structure. We find that bank interest rates have a strong information content. Monetary aggregates play no role according to the first approach; according to the second approach they do, but the economic interpretation of this finding is not straightforward. All in all, the results highlight the role of financial prices and quantities as indicators of the state of the economy. However, they do not imply a mechanical policy reaction to this information, as both the strength and the sign of the relationship between the surprises in monetary and real variables depend on the source of the shocks.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 22 (2005)
Issue (Month): 2 (March)
Pages: 285-304

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Handle: RePEc:eee:ecmode:v:22:y:2005:i:2:p:285-304
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  16. Andrea Brandolini & Piero Cipollone, 2001. "Multifactor Productivity and Labour Quality in Italy, 1981-2000," Temi di discussione (Economic working papers) 422, Bank of Italy, Economic Research and International Relations Area.
  17. Nicoletti-Altimari, Sergio, 2001. "Does money lead inflation in the euro area?," Working Paper Series 0063, European Central Bank.
  18. Trecroci, Carmine & Vega, Juan Luis, 2000. "The information content of M3 for future inflation," Working Paper Series 0033, European Central Bank.
  19. Dotsey, Michael & Hornstein, Andreas, 2003. "Should a monetary policymaker look at money?," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 547-579, April.
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  23. repec:cup:cbooks:9780521783248 is not listed on IDEAS
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