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Maintaining Low Inflation: Money, Interest Rates, and Policy Stance

  • Samuel Reynard

This paper examines the usefulness of considering monetary aggregates when assessing monetary policy stance, and contrasts monetary analysis to the current mainstream monetary policy analysis. Monetary developments, unlike interest rate stance measures, are shown to provide quantitative information on subsequent price levels. Moreover, ignoring money and focusing on interest rates and real activity measures neglects crucial information as short-term velocity movements are fully part of the monetary policy transmission process. The analysis also sheds light on the recent change in inflation volatility and persistence as well as on the Phillips curve flattening. The empirical analysis is based on US data since the 1960s as well as euro area and Swiss data since the 1970s.

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File URL: http://www.snb.ch/n/mmr/reference/working_paper_2007_05/source/working_paper_2007_05.n.pdf
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Paper provided by Swiss National Bank in its series Working Papers with number 2007-05.

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Length: 56 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:snb:snbwpa:2007-05
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  1. Stefan Gerlach & Lars E.O. Svensson, 2000. "Money and Inflation in the Euro Area: A Case for Monetary Indicators?," NBER Working Papers 8025, National Bureau of Economic Research, Inc.
  2. John H. Cochrane & Monika Piazzesi, 2002. "Bond Risk Premia," NBER Working Papers 9178, National Bureau of Economic Research, Inc.
  3. Nelson, Edward, 2003. "The Future of Monetary Aggregates in Monetary Policy Analysis," CEPR Discussion Papers 3897, C.E.P.R. Discussion Papers.
  4. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  6. Michael Woodford, 2008. "How Important Is Money in the Conduct of Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1561-1598, December.
  7. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, 02.
  8. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
  9. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
  10. Athanasios Orphanides & Richard Porter, 1998. "P* revisited: money-based inflation forecasts with a changing equilibrium velocity," Finance and Economics Discussion Series 1998-26, Board of Governors of the Federal Reserve System (U.S.).
  11. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, June.
  12. Thomas Laubach and John C. Williams, 2001. "Measuring the Natural Rate of Interest," Computing in Economics and Finance 2001 35, Society for Computational Economics.
  13. Samuel Reynard, 2004. "Financial Market Participation and the Apparent Instability of Money Demand," Working Papers 2004-01, Swiss National Bank.
  14. Fernando Alvarez & Andrew Atkeson & Chris Edmond, 2003. "On the Sluggish Response of Prices to Money in an Inventory-Theoretic Model of Money Demand," NBER Working Papers 10016, National Bureau of Economic Research, Inc.
  15. Lawrence J. Christiano, 1989. "P*: not the inflation forecaster's holy grail," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-18.
  16. James H. Stock & Mark W. Watson, 2007. "Erratum to "Why Has U.S. Inflation Become Harder to Forecast?"," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1849-1849, October.
  17. John M. Roberts, 2006. "Monetary Policy and Inflation Dynamics," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
  18. Bennett T. McCallum, 2001. "Monetary Policy Analysis in Models Without Money," NBER Working Papers 8174, National Bureau of Economic Research, Inc.
  19. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  20. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-58, September.
  21. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-92, June.
  22. Bennett T. McCallum, 2000. "Alternative Monetary Policy Rules: A Comparison with Historical Settings for the United States, the United Kingdom, and Japan," NBER Working Papers 7725, National Bureau of Economic Research, Inc.
  23. Paul De Grauwe & Magdalena Polan, 2005. "Is Inflation Always and Everywhere a Monetary Phenomenon?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(2), pages 239-259, 06.
  24. Samuel Reynard, 2006. "Money and the Great Disinflation," Working Papers 2006-07, Swiss National Bank.
  25. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
  26. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
  27. Andrew Atkeson & Lee E. Ohanian., 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
  28. Poole, William, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 197-216, May.
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