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Money as an indicator variable for monetary policy when money demand is forward looking

Author

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  • Kajanoja, Lauri

Abstract

This paper studies the gain from using money as an indicator when monetary policy in made under data uncertainty.We use a forward and backward looking model, calibrated for the euro area.The policymaker cannot completely observe the state of the economy. Money reveals some of the private sector's information to the policymaker, especially if there is a forward looking element in money demand.We show that observing money can considerably reduce the loss that is due to incomplete information.However, taking also into account other financial market data could decrease the marginal importance of money as an indicator.

Suggested Citation

  • Kajanoja, Lauri, 2003. "Money as an indicator variable for monetary policy when money demand is forward looking," Bank of Finland Research Discussion Papers 9/2003, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2003_009
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    More about this item

    Keywords

    monetary policy; partial information; money; monetary aggregates; euro area;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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