Money and the Natural Rate of Interest: Structural Estimates for the United States and the Euro Area

Javier Andrés (), López-Salido, J David and Edward Nelson ()

No 6812, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We examine the role of money in three environments: the New Keynesian model with separable utility and static money demand; a nonseparable utility variant with habit formation; and a version with adjustment costs for holding real balances. The last two variants imply forward-looking behaviour of real money balances, with forecasts of future interest rates entering current portfolio decisions. We conduct a structural econometric analysis of the U.S. and euro area economies. FIML estimates confirm the forward-looking character of money demand. A consequence is that real money balances are valuable in anticipating future variations in the natural interest rate.

Keywords: money; natural rate; New Keynesian models (search for similar items in EconPapers)
JEL-codes: E51 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
Date: 2008-05

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Related works:
Working Paper: Money and the natural rate of interest: structural estimates for the United States and the euro area (2008)
Working Paper: Money and the natural rate of interest: structural estimates for the United States and the Euro area (2007)
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