Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

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

Giovanni Favara and Paolo Giordani ()
Additional contact information
Giovanni Favara: International Institute for Economic Studies, Stockholm University
Paolo Giordani: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

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

JEL-codes: E31; E52; E58

33 pages, November 19, 2002

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