Reconsidering the Role of Money for Output, Prices and Interest Rates

Giovanni Favara and Paolo Giordani ()
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Giovanni Favara: International Institute for Economic Studies, Stockholm University

No 514, Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: New Keynesian models of monetary policy assign no role to monetary aggregates, in the sense that the level of output, prices, and interest rates can be determined without knowledge of the quantity of money. We evaluate the empirical validity of this prediction by studying the effects of shocks to monetary aggregates using an identified VAR. Shocks to monetary aggregates are isolated by means of identifying restrictions suggested by this class of models. Contrary to the theoretical predictions, shocks to broad monetary aggregates have substantial and persistent effects on output and prices.

Keywords: New-Keynesian models; LM shocks; VAR; Block-exogeneity (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon
Date: 2002-11-19
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Persistent link: http://EconPapers.repec.org/RePEc:hhs:hastef:0514

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