is the price level tied to the m2 monetary aggregate in the long run a long run link between money and prices is evident for the united states since the korean war if the m2 measure of money is used and the velocity of m2 v2 is modeled as a mean reverting series this link between m2 and prices is the basis for a dynamic model of inflation that compares favorably in forecasting exercises with phillips curve and more typical monetarist approaches the behavior of v2 is examined from 1870 to the present providing a basis for reconsidering previous findings that v2 follows a random walk copyright 1991 by american economic association

joint estimation of household and heat pump electricity demand statistical methods are applied to analyze metered heat pump and total household loads for residential dwellings the metered loads are combined with other information about the household to study usage patterns equipment energy use is a function of various determining factors and statistical methods are appropriate to reveal the underlying functional relationships a consequence of this approach is that extensive information on households should be gathered whenever metering studies are performed in order to facilitate econometric analysis of the data

money and the natural rate of interest structural estimates for the united states and the euro area abstract we examine the role of money in three environments the new keynesian model with separable utility and static money demand a nonseparable utility variant with habit formation and a version with adjustment costs for holding real balances the last two variants imply forward looking behavior of real money balances with forecasts of future interest rates entering current portfolio decisions we conduct a structural econometric analysis of the u s and euro area economies fiml estimates confirm the forward looking character of money demand a consequence is that real money balances are valuable in anticipating future variations in the natural interest rate

reconsidering the role of money for output prices and interest rates abstract new keynesian models of monetary policy downplay the role of monetary aggregates in the sense that the level of output prices and interest rates can be determined without knowledge of the quantity of money this paper evaluates the empirical validity of this prediction by studying the effects of shocks to monetary aggregates using a vector autoregression var shocks to monetary aggregates are identified by the restrictions suggested by new keynesian monetary models contrary to the theoretical predictions shocks to broad monetary aggregates have substantial and persistent effects on output prices and interest rates

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

on the sources of macroeconomic stability in the euro area in the mid 1990s the euro area experienced a change in macroeconomic volatility around the same time at business cycle frequencies the correlation between inflation and money growth changed markedly turning from positive to negative distinguishing the periods pre and post 1994 we estimate a dynamic stochastic general equilibrium model with money for the euro area the model accounts for the salient facts we then perform several counterfactual exercises to assess the drivers of these phenomena the moderation of real variables was essentially due to relatively smaller shocks to investment wage markups and preferences the apparent lack of evidence for the quantity theory of money in the short run and the changes in the volatility of nominal variables resulted primarily from a more anti inflationary and gradual monetary policy

direct effects of base money on aggregate demand theory and evidence abstract meltzer the transmission process working paper carnegie mellon university 1999a shows that real monetary base growth is a significant determinant of consumption growth in the us controlling for the short term real interest rate in this paper i show that the same property of base money holds for total output relative to trend or potential in both the us and the uk the standard optimizing is lm model cannot account for this result but i show that it can once the long term nominal interest rate is included in the money demand function because the long term real rate matters for aggregate demand the presence of the long term nominal rate in the money demand function increases the effect of nominal money stock changes on real aggregate demand when prices are sticky

special repo rates this article provides the causes and symptoms of special repo rates in a competitive market for repurchase agreements a repo rate is in effect an interest rate on loans collateralized by a specific instrument a special is a repo rate significantly below prevailing market riskless interest rates this article shows that specials can occur when those owning the collateral are inhibited whether from legal or institutional requirements or from frictional costs from supplying collateral into repurchase agreements specialness increases the equilibrium price for the underlying instrument by the present value of savings in borrowing costs associated with the repo specials this article characterizes competitive repurchase or repo markets and the equilibrium relationship between repo rates and the underlying cash market prices repurchase markets are often called financing markets since they are effectively vehicles for collateralized borrowing that are often used to finance the purchase of the underlying collateral this article provides causes and effects of specials meaning specific repo rates significantly below prevailing market interest rates for loans of similar maturity and credit risk the example of united states treasury instruments is emphasized because of the extensive use of the treasury repo market as a means of hedging against or speculating on changes in u s interest rates and because of the high incidence of specials in treasury repo rates numerous specific instru

unions power collective bargaining and optimal monetary policy we study ramsey policies and optimal monetary policy rules in a model with sticky prices and unionized labour markets collective wage bargaining and unions monopoly power dampen wage uctuations and amplify employment uctuations relatively to a dnk model the optimal

habit formation in consumption and its implications for monetary policy models this paper explores a monetary policy model with habit formation for consumers in which consumers utility depends in part on current consumption relative to past consumption the empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous condence largely because the habit formation model captures the gradual hump shaped response of real spending to various shocks the paper then embeds the habit consumption specication in a monetary policy model and nds that the responses of both spending and inflation to monetary policy actions are signicantly improved by this modication jel d12 e52 e43

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

tobin s imperfect asset substitution in optimizing general equilibrium in this paper we present a dynamic optimizing model that allows explicitly for imperfect substitutability between different financial assets this is specified in a manner which captures tobin s 1969 view that an expansion of one asset s supply affects both the yield on that asset and the spread or risk premium between returns on that asset and alternative assets our estimates of this model on u s data confirm that some of the observed deviations of long term rates from the expectations theory of the term structure can be traced to movements in the relative stocks of financial assets the richer aggregate demand and asset specifications imply that there exists an additional channel of monetary policy our results suggest that central bank operations exercise a modest influence on the relative prices of alternative financial securities and so exert an extra effect on long term yields and aggregate demand separate from their effect on the expected path of short term rates

constructing and estimating a realistic optimizing model of monetary policy abstract a dynamic stochastic general equilibrium dsge model with real and nominal both price and wage rigidities succeeds in capturing some key nominal features of u s business cycles additive technology shocks as well as multiplicative shocks are introduced and shown to be crucial monetary policy is specified as an interest rate targeting rule following developments in the structural vector autoregression var literature the interaction between real and nominal rigidities is essential to reproduce the liquidity effect of monetary policy the model is estimated by maximum likelihood on u s data and its fit is comparable to that of an unrestricted first order var besides producing reasonable impulse responses and second moments this model replicates a feature of u s business cycles never captured by previous research with dsge models that an increase in interest rates predicts a decrease in output two to six quarters in the future

money and inflation in the euro area a case for monetary indicators abstract this paper examines inflation indicators for the euro area by studying the relationship between inflation output money and interest rates using data spanning 1980 2001 the central finding is that both the output gap and the real money gap the difference between the real money stock and the long run equilibrium real money stock contain considerable information regarding future inflation in contrast the eurosystem s money growth indicator the difference between nominal money growth and a reference value the prominent first pillar in its monetary strategy contains little information about future inflation and no information beyond that contained in the output and real money gaps the predictive performance of the output gap has improved compared to that in a previous version of this paper most likely because of better estimation methods

real balance effects and monetary policy i introduction modern literature on monetary policy rules employs new keynesian optimizing models that do not explicitly include monetary aggregates see e g rotemberg and woodford 1997 clarida et al 1999 taylor 1999 in these models the demand for output derives from the log linearization of the standard euler equation characterizing household s saving decisions the real money stock does not enter the is relation and therefore monetary policy affects output and inflation only through its effect on the real interest rate when the nominal interest rate is the policy instrument it is not necessary to specify a money market equilibrium condition see romer 2000 the practice of neglecting monetary aggregates in monetary policy analysis has recently been questioned by meltzer 1999 mccallum 2001 and nelson 2002 2003 in particular mccallum 2001 points out that although no explicit term involving money appears in the standard new keynesian setup long run inflation can still be pinned down by the economy steady state nominal money growth rate moreover mccallum 2000 2001 andres et al 2001 kremer et al 2003 woodford 2003 ireland 2004a and collard and dellas 2005 analyze the case in which the resources used by consumers in conducting transactions are modeled by a nonseparable function of consumption and real money balances meltzer 1999 2001 argues that changes in real monetary base generate effects on real aggregate demand not summarized by the real interest rate on short term securities nelson 2003 emphasizes the role of money in the transmission mechanism both as a proxy for a whole spectrum of rates of return and as an indicator variable which contains information about the state of the economy the main aim of the present article is to provide additional microfoundations for an explicit role for money in the current macroeconomic debate in particular i derive a real balance effect that explicitly enters the is relation within an optimizing general equilibrium framework of the new keynesian type according to de scitovszky 1941 haberler 1946 pigou 1943 and patinkin 1965 a change in real money balances has an impact on the real financial wealth of consumers and therefore affects consumption and output notably this effect is not considered in traditional models there is in fact empirical evidence showing that real monetary base growth is a significant determinant of consumption and output gap in both the united states and in the united kingdom see chari et al 1995 meltzer 1999 nelson 2002 the present article extends the dynamic stochastic new keynesian setup with money in the utility function by introducing overlapping generations as modeled by yaari 1965 and blanchard 1985 there are good reasons to base the demand side of the economy on a discrete time stochastic monetary version of the yaari blanchard model first this kind of extension allows one to maintain the main characteristics of the so called new neoclassical synthesis that is forward looking behavior of optimizing agents and incomplete nominal adjustment of prices featured in new keynesian theories goodfriend and king 1997 second the derivation of the real balance effect does not require nonseparability in the utility function thus the implications are analytically more tractable 1 third my framework is more general because it includes the immortal representative agent setup as a particular case my analysis attempts to examine whether the presence of an explicit real balance effect in the is relation helps evaluate the role for money in designing monetary policy rules i focus on basic issues concerning the design of monetary policy rules specifically i investigate whether it is necessary for monetary policy to overreact to inflation by raising the nominal interest rate by more than the observed increase in inflation to rule out equilibrium multiplicity

ramsey monetary policy with labor market frictions abstract traditional new keynesian models prescribe that optimal monetary policy should aim at price stability in the absence of a labor market frictions the monetary authority faces no unemployment inflation trade off the design of optimal monetary policy is analyzed here for a framework with sticky prices and matching frictions in the labor market optimal policy features deviations from price stability in response to both productivity and government expenditure shocks when the hosios 1990 on the efficiency of matching and related models of search and unemployment review of economic studies 57 2 279 298 condition is not met search externalities make the flexible price allocation unfeasible optimal deviations from price stability increase with workers bargaining power as firms incentives to post vacancies fall and unemployment fluctuates above the pareto efficient one

do real balance effects invalidate the taylor principle in closed and open economies this paper examines the determinacy implications of forecast based monetary policy rules that set the interest rate in response to expected future inflation in a neo wicksellian model that incorporates real balance effects we show that the presence of such effects in closed economies restricts the ability of the taylor principle to prevent indeterminacy of the rational expectations equilibrium the problem is exacerbated in open economies particularly if the policy rule reacts to consumer price rather than domestic price inflation however determinacy can be restored in both closed and open economies with the addition of monetary policy inertia

monetary policy trade offs and the correlation between nominal interest rates and real output the authors present a structural model of the u s economy that combines their price contracting specification with a term structure relationship an aggregate demand curve and a monetary policy reaction function the model matches important features of postwar data well and provides a structural explanation of the correlation between real output and the short term nominal rate of interest the authors perform a battery of monetary policy experiments that show that as viewed through the lens of this model monetary policy has struck a good balance recently among competing monetary policy objectives copyright 1995 by american economic association

an optimizing is lm specification for monetary policy and business cycle analysis we ask whether relations of the is lm type can sensibly be used for the aggregate demand portion of a dynamic optimizing general equilibrium model intended for analysis of issues regarding monetary policy and cyclical fluctuations the main result is that only one change the addition of a term regarding expected future income is needed to make the is function match a fully optimizing model whereas no changes are needed for the lm function this modification leads to a dynamic forward looking model of aggregate demand that is tractable and usable with a wide variety of aggregate supply specifications theoretical applications concerning price level determinacy and gradual price adjustment are included

competition and inflation differentials in emu in a monetary union inflation rate differentials may be substantial over the business cycle this paper parameterizes a two country monetary union in which different economic structures in the two countries generate temporary inflation differentials cross country differences are introduced in i the elasticity of demand in the goods markets which cause producers to discriminate prices ii the degree of price inertia and iii the degree of openness or preference for foreign goods in consumption the model is calibrated to reproduce two average large emu countries and it is able to generate such inflation differentials we find the mechanism of price discrimination quantitatively more important than the differences in price inertia moreover under asymmetric shocks differences in the degree of openness such as those observed within the emu can have sizeable effects on the dispersion of inflation rates

money and information in a new neoclassical synthesis framework we consider an otherwise standard new neoclassical synthesis theoretical framework that allows a role for money money in our model has an informational role which facilitates the estimation of the unobserved shocks that drive potential output and thus the state of the economy for this purpose we estimate a small scale sticky price model using bayesian techniques our findings support the view that money has information value this is reflected in higher precision in terms of unobserved model concepts such as the natural rate of output moreover our results highlight how modelling money demand can provide insights about structural features of the economy that may be important for the design of interest rate rules focusing on money also allows for a step towards resolving the price puzzle money demand shocks can confound monetary policy shocks to generate a perverse price response in vector autoregressions var

monetary and fiscal policy interactions in a micro founded model of a monetary union abstract this paper analyzes in detail the mechanisms behind fiscal stabilization policy and the role of policy commitment in a micro founded new keynesian model of a two country monetary union which is hit by supply shocks we also explore the determinants of the gains from fiscal stabilization while monetary policy with identical union members is concerned with stabilizing the union wide economy fiscal policy aims at stabilizing inflation differences and the terms of trade besides exploring optimal policies we also consider monetary and fiscal rules we study these rules both under coordination and non coordination by the fiscal authorities

money s role in the monetary business cycle a small structural model of the monetary business cycle implies that real money balances enter into a correctly specified forward looking is curve if and only if they enter into a correctly specified forward looking phillips curve the model also implies that empirical measures of real balances must be adjusted for shifts in money demand to accurately isolate and quantify the dynamic effects of money on output and inflation maximum likelihood estimates of the modelos parameters take both these considerations into account but still suggest that money plays a minimal role in the monetary business cycle

european inflation dynamics abstract we provide evidence on the fit of the new phillips curve npc for the euro area over the period 1970 1998 and use it as a tool to compare the characteristics of european inflation dynamics with those observed in the u s we also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs as well as that of its two main components namely labor productivity and real wages some of the findings can be summarized as follows a the npc fits euro area data very well possibly better than u s data b the degree of price stickiness implied by the estimates is substantial but in line with survey evidence and u s estimates c inflation dynamics in the euro area appear to have a stronger forward looking component i e less inertia than in the u s d labor market frictions as manifested in the behavior of the wage markup appear to have played a key role in shaping the behavior of marginal costs and consequently inflation in europe

eurosystem monetary targeting lessons from u s data abstract using a small empirical model of inflation output and money estimated on u s data we compare the relative performance of monetary targeting and inflation targeting the results show monetary targeting to be quite inefficient yielding both higher inflation and output variability this is true even with a nonstochastic money demand formulation our results are also robust to using a p model of inflation therefore in these popular frameworks there is no support for the prominent role given to money growth in the eurosystem s monetary policy strategy

information variables for monetary policy in an estimated structural model of the euro area a small scale new keynesian model for the euro area is estimated with maximum likelihood under the assumptions of imperfect information and discretionary monetary policy the estimated parametrization of this widely used dynamic stochastic model unveils the monetary authorities objectives and the information content of two indicator variables monetary aggregates and real unit labour costs the results highlight a significant policy concern about interest rate smoothing and inflation almost no concern for output gap stabilization emerges regarding indicator variables unit labour costs provide information on potential output that is helpful for stabilization policy no useful information role emerges for monetary aggregates

the information content of money in forecasting euro area inflation this article contributes to the debate on the role of money in monetary policy by analysing the information content of money in forecasting euro area inflation we compare the predictive performance within and among various classes of structural and empirical models in a consistent framework using bayesian and other estimation techniques we find that money contains relevant information for inflation in some model classes money based new keynesian dynamic stochastic general equilibrium dsge models and vector autoregressions vars incorporating money perform better than their cashless counterparts but there are also indications that the contribution of money has its limits the marginal contribution of money to forecasting accuracy is often small money adds little to dynamic factor models and it worsens forecasting accuracy of partial equilibrium models finally nonmonetary models dominate monetary models in an all out horserace

estimating the evolution of money s role in the u s monetary business cycle we assess money s role in the post wwii u s business cycle by employing both fixed coefficient and rolling window bayesian estimations of a structural model of the business cycle with money our empirical evidence favors a specification with drifting parameters for money consumption nonseparability and the federal reserve s reaction to nominal money growth the role of money is estimated to have been important during the 1970s and declined afterward the omission of money produces severely distorted impulse response functions relative to the model with money money is found to be important in replicating the u s output volatility during the great inflation

when does the cost channel pose a challenge to inflation targeting central banks abstract in a sticky price model where firms finance their production inputs there is both a lower and an upper bound on the central bank s inflation response necessary to rule out the possibility of self fulfilling inflation expectations this paper shows that real wage rigidities decrease this upper bound but coefficients in the range of those on the taylor rule place the economy well within the determinacy region however when there is time variation in the share of firms who finance their inputs i e markov switching then inflation targeting interest rate rules frequently result in indeterminacy even if the central bank also targets output adding a nominal growth target to the policy rule can often alleviate this indeterminacy and therefore anchor inflation expectations

the demand for m3 in the euro area in this paper an empirically stable money demand model for m3 in the euro area is constructed starting with a multivariate system three cointegrating relationships with economic content are found i the spread between the long term and the short term nominal interest rates ii the long term real interest rate and iii a long run demand for broad money m3 there is evidence that the determinants of m3 money demand are weakly exogenous with respect to the long run parameters hence following a general to specific modelling approach a parsimonious conditional error correction model for m3 money demand is derived which can be interpreted economically for the conditional model long run and short run parameter stability is extensively tested and not rejected copyright 2001 john wiley sons ltd

does money matter for the identification of monetary policy shocks a dsge perspective this paper investigates how the identification assumptions of monetary policy shocks modify the inference in a standard dsge model considering svar models in which either the interest rate is predetermined for money or money and the interest rate are simultaneously determined two dsge models are estimated by minimum distance estimation the estimation results reveal that real balance effects are necessary to replicate the high persistence implied by the simultaneity assumption in addition the estimated monetary policy rule is sensitive to the identification scheme this suggests that the way money is introduced in the identification scheme is not neutral for the estimation of dsge models c 2010 elsevier b v all rights reserved

money in the production function a new keynesian dsge perspective this article checks whether money is an omitted variable in the production process by proposing a microfounded new keynesian dynamic stochastic general equilibrium model in this framework real money balances enter the production function and money demanded by households is differentiated from that demanded by firms using a bayesian analysis our model weakens the hypothesis that money is a factor of production however the demand of money by firms appears to have a significant impact on the economy even if this demand has a low weight in the production process

money in an estimated business cycle model of the euro area this article examines the role of money in a small scale dynamic general equilibrium model of the euro zone estimated by maximum likelihood the model allows for both intertemporal and intratemporal non separability in preferences we find first that real balances do not affect the marginal utility of consumption second money demand shocks mainly help to forecast real balances while real shocks explain the bulk of price output and interest rates fluctuations third the calculation of the natural rate of interest reveals that the evolution of the interest rate is mostly accounted for by the real sources of fluctuations

dilemma of the silver standard economies the case of china exchange rate commitments implied in the silver standard originally anchored china s monetary policy and the inflation rate in the early republican period it was believed that china s free silver standard acted as a natural check on the excessive issuing of notes by warlords and local governments this consensus view however overlooks the fact that the silver standard was inherently unstable because it left no room for monetary policy to stabilize output and inflation this article employs a formal structural model to show that a fiat currency unlinked to fluctuations in the price of silver that allows government to implement self adjusting monetary policies would further stabilize china s output and inflation