TY  - UNPD
A1  - Beck, Günter W.
A1  - Wieland, Volker
T1  - Money in monetary policy design under uncertainty : the two-pillar Phillips curve versus ECB-style cross-checking
T2  - Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2007,17
N2  - 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
T3  - CFS working paper series - 2007, 17 
KW  - monetary policy
KW  - quantity theory
KW  - Phillips Curve
KW  - European Central Bank
KW  - policy under uncertainty
KW  - Europäische Union
KW  - Geldpolitik
KW  - Entscheidung bei Unsicherheit
KW  - Entscheidungsregel
KW  - Quantitätstheorie
KW  - Phillips-Kurve
KW  - Notenbank
Y1  - 2007
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/1094
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30-43980
N1  - 1st version: August 26, 2006 ; This version: October 18, 2006
IS  - Version October 18, 2006
ER  -