Working Paper: CEPR ID: DP4125
Authors: Francesco Lippi; Stefano Neri
Abstract: This Paper estimates a small New-Keynesian model with imperfect information and optimal discretionary policy using data for the euro area. The model is used to assess the usefulness of monetary aggregates and unit labour costs as information variables for monetary policy. The estimates reveal that the information content of the M3 monetary aggregate is limited. A more useful role emerges for the unit labour costs indicator, which contains information that helps to reduce the volatility of the output gap. Finally, the estimated weights for the objectives of monetary policy indicate that considerable importance is attributed to interest-rate smoothing, greater than the importance attributed to the output gap stabilization. This finding indicates that the welfare gains of commitment may be smaller than is suggested by typical parameterizations of New-Keynesian models.
Keywords: inflation; Kalman filter; monetary policy; output gap
JEL Codes: E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| M3 monetary aggregate (E51) | stabilization policy (E63) |
| unit labor cost indicator (J39) | potential output (E23) |
| unit labor cost indicator (J39) | output gap volatility (E39) |
| better information from unit labor costs (J39) | effective monetary policy responses (E52) |
| effective monetary policy responses (E52) | stabilize economy (E63) |
| central bank's focus on interest-rate smoothing (E52) | policy outcomes (D78) |
| accurate parameter estimation (C51) | understanding dynamics of monetary policy (E52) |