Arbeitspapier
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 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.
- Language
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Englisch
- Bibliographic citation
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Series: ECB Working Paper ; No. 1191
- Classification
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Wirtschaft
Business Fluctuations; Cycles
Demand for Money
Interest Rates: Determination, Term Structure, and Effects
Monetary Policy
Central Banks and Their Policies
- Subject
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European Central Bank
monetary policy
Money
new-Keynesian model
policy under uncertainty
quantity theory
Geldpolitik
Zentralbank
Entscheidung unter Unsicherheit
Zins
Neoklassische Synthese
- Event
-
Geistige Schöpfung
- (who)
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Wieland, Volker
Beck, Günter W.
- Event
-
Veröffentlichung
- (who)
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European Central Bank (ECB)
- (where)
-
Frankfurt a. M.
- (when)
-
2010
- Handle
- Last update
-
10.03.2025, 11:44 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Wieland, Volker
- Beck, Günter W.
- European Central Bank (ECB)
Time of origin
- 2010
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