Information Variables for Monetary Policy in a Small Structural Model of the Euro Area

Francesco Lippi and Stefano Neri

No 4125, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This Paper estimates a small New-Keynesian model with imperfect information and optimal discretionary policy using data for the euro area. The model is used to assess the usefulness of monetary aggregates and unit labour costs as information variables for monetary policy. The estimates reveal that the information content of the M3 monetary aggregate is limited. A more useful role emerges for the unit labour costs indicator, which contains information that helps to reduce the volatility of the output gap. Finally, the estimated weights for the objectives of monetary policy indicate that considerable importance is attributed to interest-rate smoothing, greater than the importance attributed to the output gap stabilization. This finding indicates that the welfare gains of commitment may be smaller than is suggested by typical parameterizations of New-Keynesian models.

Keywords: Kalman filter; Monetary policy; inflation; Output gap (search for similar items in EconPapers)
JEL-codes: E50 (search for similar items in EconPapers)
Date: 2003-12
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (13)

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Working Paper: Information variables for monetary policy in a small structural model of the euro area (2004)
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