Central bank misperceptions and the role of money in interest rate rules

Research with Keynesian-style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant. Critics, however, have argued that 
Research with Keynesian-style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant. Critics, however, have argued that these models need to be modified to account for observed money growth and inflation trends, and that monetary trends may serve as a useful cross-check for monetary policy. We identify an important source of monetary trends in form of persistent central bank misperceptions regarding potential output. Simulations with historical output gap estimates indicate that such misperceptions may induce persistent errors in monetary policy and sustained trends in money growth and inflation. If interest rate prescriptions derived from Keynesian-style models are augmented with a cross-check against money-based estimates of trend inflation, inflation control is improved substantially.
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Metadaten
Author:Günter W. Beck, Volker Wieland
URN:urn:nbn:de:hebis:30-57630
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2008,25
Series (Serial Number):CFS working paper series (2008, 25)
Document Type:Working Paper
Language:English
Year of Completion:2008
Year of first Publication:2008
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2008/09/24
Tag:Monetary; Money; Output Gap Uncertainty; Policy Under Uncertainty; Quantity Theory; Taylor Rules
SWD-Keyword:Anreiz; Einkommen; Haushalt
HeBIS PPN:205698522
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:E32 Business Fluctuations; Cycles
E41 Demand for Money
E43 Determination of Interest Rates; Term Structure of Interest Rates
E52 Monetary Policy
E58 Central Banks and Their Policies
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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