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Money as an indicator variable for monetary policy when money demand is forward looking

  • Kajanoja, Lauri

    (Bank of Finland Research)

Registered author(s):

    This paper studies the gain from using money as an indicator when monetary policy in made under data uncertainty. We use a forward and backward looking model, calibrated for the euro area. The policymaker cannot completely observe the state of the economy. Money reveals some of the private sector’s information to the policymaker, especially if there is a forward looking element in money demand. We show that observing money can considerably reduce the loss that is due to incomplete information. However, taking also into account other financial market data could decrease the marginal importance of money as an indicator.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0309.pdf
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    Paper provided by Bank of Finland in its series Research Discussion Papers with number 9/2003.

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    Length: 38 pages
    Date of creation: 09 Apr 2003
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2003_009
    Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/

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    8. Aoki, Kosuke, 2002. "Optimal Commitment Policy Under Noisy Information," CEPR Discussion Papers 3370, C.E.P.R. Discussion Papers.
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    17. Joaquim Vieira Ferreira Levy & Alessandro Calza & Dieter Gerdesmeier, 2001. "Euro Area Money Demand; Measuring the Opportunity Costs Appropriately," IMF Working Papers 01/179, International Monetary Fund.
    18. Nelson, Edward, 2003. "The future of monetary aggregates in monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1029-1059, July.
    19. G. Coenen & J.-L. Vega, 2001. "The demand for M3 in the euro area," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(6), pages 727-748.
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