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Dynamic IS curves with and without money: An international comparison

  • Hafer, R.W.
  • Jones, Garett

When money is added to a dynamic IS model, evidence from six countries indicates that money growth usually helps predict the GDP gap and that the predictive power of a short-term real interest is much weaker than previous work suggests. Thus, for dynamic IS models such as that used by Rudebusch, G.D., Svensson, L.E.O. [1999. Policy rules and inflation targeting. In: Taylor, J.B. (Ed.), Monetary Policy Rules. University of Chicago Press, Chicago, pp. 203-246; 2002. Eurosystem monetary targeting: lessons from US data. European Economic Review 46, 417-442], the omission of money appears to come at a high cost.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 27 (2008)
Issue (Month): 4 (June)
Pages: 609-616

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Handle: RePEc:eee:jimfin:v:27:y:2008:i:4:p:609-616
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  1. Charles Goodhart & Boris Hofmann, 2005. "The IS curve and the transmission of monetary policy: is there a puzzle?," Applied Economics, Taylor & Francis Journals, vol. 37(1), pages 29-36.
  2. Nelson, Edward, 2003. "Money and the Transmission Mechanism in the Optimizing IS-LM Specification," CEPR Discussion Papers 3898, C.E.P.R. Discussion Papers.
  3. Nelson, Edward, 2003. "The future of monetary aggregates in monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1029-1059, July.
  4. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Working Papers in Applied Economic Theory 98-03, Federal Reserve Bank of San Francisco.
  5. Rudebusch, Glenn D. & Svensson, Lars E. O., 1999. "Eurosystem Monetary Targeting: Lessons from U.S. Data," Working Paper Series 92, Sveriges Riksbank (Central Bank of Sweden).
  6. Daniel M. Laskar, 1983. "Short-Run Independence of Monetary Policy under a Pegged Exchange-Rates System: An Econometric Approach," NBER Chapters, in: The International Transmission of Inflation, pages 314-348 National Bureau of Economic Research, Inc.
  7. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
  8. Bennett T. McCallum, 2001. "Should Monetary Policy Respond Strongly to Output Gaps?," NBER Working Papers 8226, National Bureau of Economic Research, Inc.
  9. Nelson, Edward, 2002. "Direct effects of base money on aggregate demand: theory and evidence," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 687-708, May.
  10. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-39, March.
  11. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting "M" back in monetary policy," Proceedings, Federal Reserve Bank of Cleveland, pages 1217-1264.
  12. Bennett T. McCallum, 2001. "Monetary Policy Analysis in Models Without Money," NBER Working Papers 8174, National Bureau of Economic Research, Inc.
  13. Hafer, R.W. & Haslag, Joseph H. & Jones, Garett, 2007. "On money and output: Is money redundant?," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 945-954, April.
  14. Gerlach, Stefan & Smets, Frank, 1999. "Output gaps and monetary policy in the EMU area1," European Economic Review, Elsevier, vol. 43(4-6), pages 801-812, April.
  15. Glenn D. Rudebusch, 2002. "Assessing the Lucas critique in monetary policy models," Working Paper Series 2002-02, Federal Reserve Bank of San Francisco.
  16. Michael R. Darby, 1983. "Sterilization and Monetary Control: Concepts, Issues, and a Reduced-Form Test," NBER Chapters, in: The International Transmission of Inflation, pages 291-313 National Bureau of Economic Research, Inc.
  17. William Kerr & Robert G. King, 1996. "Limits on interest rate rules in the IS model," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 47-75.
  18. Brückner, Matthias & Schabert, Andreas, 2002. "Does broad money matter for interest rate policy?," ZEI Working Papers B 15-2002, ZEI - Center for European Integration Studies, University of Bonn.
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