Should Monetary Policy Respond to Money Growth? New Results for the Euro Area

Abstract

In recent years, the relevance of money growth indicators for the conduct of monetary policy has been questioned in the mainstream academic literature. It is widely argued that monetary policy should directly relate short-term interest rates to inflation and the output gap. The present paper investigates whether the performance of this type of interest rate rule can be significantly improved by adding a policy response to money growth. In contrast to most previous studies, our analysis explicitly takes into account the fact that real-time data on both actual and potential output, and hence the output gap, may be subject to substantial measurement errors. Broadly speaking, we find that the greater the degree of output gap uncertainty, the greater the benefits of incorporat-

Does Money Matter for Inflation in Ghana?

“…Berger and Stavrev (2008a) find that money contains relevant information for future inflation in the euro area but caution that its marginal contribution to inflation forecast is limited. Scharnagl et al (2010) show that money enhances the performance of monetary policy reaction function in the euro area and suggest that the information value of money relates to the uncertainty about current real output (this information is only available with a lag). For the United States, Berger and Österholm (2008b) note that the contribution of money to U.S. inflation forecast is limited and has diminished in more recent periods.…”

Money In Modern Macro Models: A Review of the Arguments

“…The role of money in dealing with data uncertainty is also highlighted in Scharnagl et al (2010) in an extension of the analysis of simple monetary policy rules to the case where policy-makers face measurement problems with respect to both actual and potential output. They change the standard NK model (1) -(3) by including a money demand function (which depends on actual output) and realistic degrees of output gap uncertainty.…”

Money As Indicator for the Natural Rate of Interest

“…Standard deviation of noise shocks σ ξ Orphanides (2003), Coenen, Levin, and Wieland (2005) and Scharnagl, Gerberding, and Seitz (2010) examine the amount of noise in the observed output gap for U.S., euro area, and German data, respectively. They report estimates for σ ξ very close to but below 0.01.…”

“…The second branch of the related literature studies the indicator role of money demand when monetary policymakers lack information about the state of the economy (Dotsey and Hornstein (2003), Coenen, Levin, and Wieland (2005), Lippi and Neri (2007), Beck and Wieland (2007), Beck and Wieland (2008), Scharnagl, Gerberding, and Seitz (2010), Unsal, Portillo, and Berg (2010)). 3 A common feature of this literature is that it treats the money demand residual as mutually independent of all other structural shocks in the economy.…”