Money in monetary policy design under uncertainty : the two-pillar Phillips curve versus ECB-style cross-checking

The European Central Bank has assigned a special role to money in its two pillar strategy and has received much criticism for this decision. In this paper, we explore possible justifications. The case against including m
The European Central Bank has assigned a special role to money in its two pillar strategy and has received much criticism for this decision. In this paper, we explore possible justifications. The case against including money in the central bank’s interest rate rule is based on a standard model of the monetary transmission process that underlies many contributions to research on monetary policy in the last two decades. Of course, if one allows for a direct effect of money on output or inflation as in the empirical “two-pillar” Phillips curves estimated in some recent contributions, it would be optimal to include a measure of (long-run) money growth in the rule. In this paper, we develop a justification for including money in the interest rate rule by allowing for imperfect knowledge regarding unobservables such as potential output and equilibrium interest rates. We formulate a novel characterization of ECB-style monetary cross-checking and show that it can generate substantial stabilization benefits in the event of persistent policy misperceptions regarding potential output. Such misperceptions cause a bias in policy setting. We find that cross-checking and changing interest rates in response to sustained deviations of long-run money growth helps the central bank to overcome this bias. Our argument in favor of ECB-style cross-checking does not require direct effects of money on output or inflation. JEL Classification: E32, E41, E43, E52, E58
show moreshow less

Download full text files

Export metadata

  • Export Bibtex
  • Export RIS

Additional Services

    Share in Twitter Search Google Scholar
Metadaten
Author:Günter W. Beck, Volker Wieland
URN:urn:nbn:de:hebis:30-43980
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2007,17
Series (Serial Number):CFS working paper series (2007, 17)
Document Type:Working Paper
Language:English
Year of Completion:2007
Year of first Publication:2007
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2007/04/30
Tag:European Central Bank; Phillips Curve; monetary policy; policy under uncertainty; quantity theory
SWD-Keyword:Entscheidung bei Unsicherheit; Entscheidungsregel; Europäische Union; Geldpolitik; Notenbank; Phillips-Kurve; Quantitätstheorie
Issue:Version October 18, 2006
Pagenumber:17
Note:
1st version: August 26, 2006 ; This version: October 18, 2006
HeBIS PPN:187516154
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

$Rev: 11761 $