hermann remsperger : money in an uncertain world speech by dr hermann remsperger, member of the executive board of the deutsche bundesbank, at a dinner speech, bundesbank and university of bonn workshop, eltville, 27 - 28 october 2005. * * * ladies and gentleman, it is a pleasure for me to speak to you this evening on the role of money in an uncertain world. of course, the challenge of making decisions under different forms of uncertainties does not only apply to the conduct of monetary policy. on the contrary, model and parameter uncertainty, data uncertainty and shock uncertainty are present in many areas of our everyday life. as an example, take medical science. on the one side you could argue that doctors know more about the working of the human body than economists know about the functioning of the economy. but on the other side there is also no doubt that certain health problems are not entirely understood. at least it is a fact that you very often get different opinions about how certain health problems ought to be treated. uncertainty and monetary policy decision making well, before i become too much involved in health care, let me get back to those uncertainties with which we are confronted as central bankers. here, the package insert or the instructions at our disposal is the stock of economic research. all the different types of uncertainty have been picked up by academic literature. however, while the literature usually focuses on only one sort of uncertainty at a time, we face all of them simultaneously. i will focus on two of them, one is model uncertainty and the other data uncertainty. given the overall topic of this work - shop, i would like to convey the key message of my talk without any further delay : the analysis of monetary aggregates can play and should play an important role to cope with these two challenges. model uncertainty and money as central bankers we need models to structure our thoughts and to estimate the impact of our decisions. however, there is no consensus about which model is the appropriate representation of the real world. as a consequence, most central banks – including the ecb – use a wide range of models. but with such a variety of models, the problem of setting the appropriate monetary policy stance becomes a very difficult task. i think that ben mccallum is perfectly right in that the preferred policy rule should be one that works ‘ reasonably well in a variety of plausible quantitative models ’. 1 by the way, this approach can also be applied to the discussion whether monetary

in particular to a policy rule of the taylor type, which places a relatively large weight on the output gap. orphanides and others have shown that in the seventies and eighties, estimates of the us output gap have been subject to large and persistent measurement errors. 8 on average, there has been a downward bias of this measure of economic activity which in turn led to a monetary policy of the fed that - with hindsight - must be judged as too expansionary. as a consequence, the late 1970s and the early 1980s have been characterized by high inflation rates in the usa. i believe that the bundesbank managed to prevent this kind of problems. our research has shown that the bundesbank did not assign an important role to the level of the output gap which is especially prone to the real - time data problem. instead, we focused on deviations of money growth from target, on deviations of the inflation rate from the price norm and on deviations of the growth rate of real output from the growth rate of potential output. 9 this approach is much less subject to measurement errors than one that uses the level of the output gap. see coenen, g., levin, a. and wieland, v. ( 2005 ) „ data uncertainty and the role of money as an information variable for monetary policy “, european economic review ( 49 ), pp. 975 - 1006. for the usa, see e. g. orphanides, a. ( 2003 ), the quest for prosperity without inflation, journal of monetary economics, 50 ( 3 ), s. 633 – 663. for the uk, see e. g. nelson, e. and nikolov, k. ( 2003 ), uk inflation in the 1970s and 1980s : the role of output gap mismeasurement, journal of economics and business, 55, s. 353 – 370. for germany, see gerberding, c., seitz, f. and worms, a. ( 2005 ), how the bundesbank really conducted monetary policy : an analysis based on real - time data ; north american journal of economics and finance ( forthcoming ). see gerberding, c., seitz, f. and worms, a. ( 2005 ), how the bundesbank really conducted monetary policy : an analysis based on real - time data ; north american journal of economics and finance ( forthcoming ). 3 / 4 based on our previous research on “ how the bun