Money in monetary policy design : monetary cross-checking in the New-Keynesian model

In the New-Keynesian model, optimal interest rate policy under uncertainty is formulated without reference to monetary aggregates as long as certain standard assumptions on the distributions of unobservables are satisfie
In the New-Keynesian model, optimal interest rate policy under uncertainty is formulated without reference to monetary aggregates as long as certain standard assumptions on the distributions of unobservables are satisfied. The model has been criticized for failing to explain common trends in money growth and inflation, and that therefore money should be used as a cross-check in policy formulation (see Lucas (2007)). We show that the New-Keynesian model can explain such trends if one allows for the possibility of persistent central bank misperceptions. Such misperceptions motivate the search for policies that include additional robustness checks. In earlier work, we proposed an interest rate rule that is near-optimal in normal times but includes a cross-check with monetary information. In case of unusual monetary trends, interest rates are adjusted. In this paper, we show in detail how to derive the appropriate magnitude of the interest rate adjustment following a significant cross-check with monetary information, when the New-Keynesian model is the central bank’s preferred model. The cross-check is shown to be effective in offsetting persistent deviations of inflation due to central bank misperceptions. Keywords: Monetary Policy, New-Keynesian Model, Money, Quantity Theory, European Central Bank, Policy Under Uncertainty
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Metadaten
Author:Günter W. Beck, Volker Wieland
URN:urn:nbn:de:hebis:30-71820
Parent Title (German):CFS working paper series ; 2009, 19
Series (Serial Number):CFS working paper series (2009, 19)
Document Type:Working Paper
Language:English
Date of Publication (online):2009/10/19
Year of first Publication:2009
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2009/10/19
Tag:European Central Bank ; Monetary Policy ; Money ; New-Keynesian Model ; Policy Under Uncertainty; Quantity Theory
HeBIS PPN:219742995
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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