Money in Monetary Policy Design: A Formal Characterization of ECB-Style Cross-Checking

Guenter Beck and Volker Wieland

Journal of the European Economic Association, 2007, vol. 5, issue 2-3, 524-533

Abstract: The European Central Bank (ECB) has assigned a special role to money in its two-pillar strategy and has received much criticism for this decision. The case against including money in the central bank's interest rate rule is based on a standard model of the monetary transmission process that underlies many contributions to research on monetary policy in the last two decades. In this paper, we develop a justification for including money in the interest rate rule by allowing for imperfect knowledge regarding unobservables such as potential output and equilibrium interest rates. We formulate a novel characterization of ECB-style monetary cross-checking and show that it can generate substantial stabilization benefits in the event of persistent policy misperceptions regarding potential output. (JEL: E32, E41, E43, E52, E58) (c) 2007 by the European Economic Association.

Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:tpr:jeurec:v:5:y:2007:i:2-3:p:524-533

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