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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 514:
Reconsidering the Role of Money for Output, Prices and Interest Rates

Giovanni Favara and Paolo Giordani ()

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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