Research Discussion Papers, Bank of Finland
No 9/2003:
Money as an indicator variable for monetary policy when money demand is forward looking
Lauri Kajanoja
Abstract: This paper studies the gain from using money as an
indicator when monetary policy in made under data uncertainty. We use a
forward and backward looking model, calibrated for the euro area. The
policymaker cannot completely observe the state of the economy. Money
reveals some of the private sector’s information to the policymaker,
especially if there is a forward looking element in money demand. We show
that observing money can considerably reduce the loss that is due to
incomplete information. However, taking also into account other financial
market data could decrease the marginal importance of money as an
indicator.
Keywords: monetary policy; partial information; money; monetary aggregates; euro area; (follow links to similar papers)
JEL-Codes: E47; E52; E58; (follow links to similar papers)
38 pages, April 9, 2003
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