Arbeitspapier

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

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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.

Language: Englisch

Bibliographic citation: Series: CFS Working Paper ; No. 2008/25

Classification: Wirtschaft
Business Fluctuations; Cycles
Demand for Money
Interest Rates: Determination, Term Structure, and Effects
Monetary Policy
Central Banks and Their Policies

Subject: Taylor Rules
Money
Quantity Theory
Output Gap Uncertainty
Monetary Policy Under Uncertainty
Geldpolitik
Wirtschaftspotenzial
Zinspolitik
Quantitätstheorie
Taylor-Regel
Theorie

Event: Geistige Schöpfung

(who): Beck, Günter W.
Wieland, Volker

Event: Veröffentlichung

(who): Goethe University Frankfurt, Center for Financial Studies (CFS)

(where): Frankfurt a. M.

(when): 2008

Handle: http://hdl.handle.net/10419/25560

URN: urn:nbn:de:hebis:30-57630

Last update: 10.03.2025, 11:44 AM CET

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Object type

Arbeitspapier

Associated

Beck, Günter W.
Wieland, Volker
Goethe University Frankfurt, Center for Financial Studies (CFS)

Time of origin

2008

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