SSE/EFI Working Paper Series in Economics and Finance
Giovanni Favara and Paolo Giordani
Reconsidering the Role of Money for Output, Prices and Interest Rates
Abstract: New Keynesian models of monetary policy assign no role to
monetary aggregates, in the sense that the level of output, prices, and
interest rates can be determined without knowledge of the quantity of
money. We evaluate the empirical validity of this prediction by studying
the effects of shocks to monetary aggregates using an identified VAR.
Shocks to monetary aggregates are isolated by means of identifying
restrictions suggested by this class of models. Contrary to the theoretical
predictions, shocks to broad monetary aggregates have substantial and
persistent effects on output and prices.
Keywords: New-Keynesian models; LM shocks; VAR; Block-exogeneity; (follow links to similar papers)
JEL-Codes: E31; E52; E58; (follow links to similar papers)
33 pages, November 19, 2002
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