Working Paper: CEPR ID: DP3812
Authors: Günter Coenen; Andrew Levin; Volker Wieland
Abstract: In this study, we perform a quantitative assessment of the role of money as an indicator variable for monetary policy in the euro area. We document the magnitude of revisions to euro area-wide data on output, prices and money, and find that monetary aggregates have a potentially significant role in providing information about current real output. We then proceed to analyse the information content of money in a forward-looking model in which monetary policy is optimally determined subject to incomplete information about the true state of the economy. We show that monetary aggregates may have substantial information content in an environment with high variability of output measurement errors, low variability of money demand shocks, and a strong contemporaneous linkage between money demand and real output. As a practical matter, however, we conclude that money has fairly limited information content as an indicator of contemporaneous aggregate demand in the euro area.
Keywords: euro area; kalman filter; macroeconomic modelling; measurement error; monetary policy rules; rational expectations
JEL Codes: E31; E52; E58; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary aggregates (E19) | monetary policy (E52) |
| money demand (E41) | real output (E23) |
| measurement errors in output data (C51) | assessment of current economic activity (E66) |
| M3 (money supply) (E51) | real output (E23) |