Central Bank Misperceptions and the Role of Money in Interest Rate Rules

Volker Wieland and Guenter Beck

No 6947, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Research with Keynesian-style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant. Critics, however, have argued that these models need to be modified to account for observed money growth and inflation trends, and that monetary trends may serve as a useful cross-check for monetary policy. We identify an important source of monetary trends in form of persistent central bank misperceptions regarding potential output. Simulations with historical output gap estimates indicate that such misperceptions may induce persistent errors in monetary policy and sustained trends in money growth and inflation. If interest rate prescriptions derived from Keynesian-style models are augmented with a cross-check against money-based estimates of trend inflation, inflation control is improved substantially.

Keywords: Taylor rules; Money; Quantity theory; Output gap uncertainty; Monetary policy under uncertainty (search for similar items in EconPapers)
JEL-codes: E32 E41 E43 E52 E58 (search for similar items in EconPapers)
Date: 2008-08
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (63)

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Journal Article: Central bank misperceptions and the role of money in interest-rate rules (2008)
Working Paper: Central Bank misperceptions and the role of money in interest rate rules (2008)
Working Paper: Central bank misperceptions and the role of money in interest rate rules (2008)
Working Paper: Central Bank Misperceptions and the Role of Money in Interest Rate Rules (2008)
Working Paper: Central bank misperceptions and the role of money in interest rate rules (2008)
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