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

  • Javier Andrés

    ()

    (Universidad de Valencia)

  • David López-Salido

    ()

    (Federal Reserve Board)

  • Edward Nelson

    ()

    (Federal Reserve Bank of St. Louis)

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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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/08/Fic/dt0805e.pdf
File Function: First version, March 2008
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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 0805.

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Length: 50 pages
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:bde:wpaper:0805
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