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On the relevance of monetary aggregates in monetary policy models

Eva-Ulrike Feldkord

No 317, HWWA Discussion Papers from Hamburg Institute of International Economics (HWWA)

Abstract: This paper develops a business cycle model with a financial intermediation sector. Financial wealth is defined as a predetermined state variable. Both, the additional sector of financial intermediaries and predetermination of financial wealth, affect the demand for real financial wealth. If real financial wealth also enters the monetary policy rule, the conditions for stability and uniqueness of the macroeconomic equilibrium path change fundamentally compared to standard New Keynesian business cycle models. Here, real financial wealth is interpreted as a real broad monetary aggregate. Furthermore, different interest rate rules and their consequences for stability and uniqueness of the macroeconomic equilibrium path are considered. Two monetary policy rules are found to be feasible - i.e. if these monetary policy rules are applied there exists a stable and unique macroeconomic equilibrium path. Simulations of the model showed that the monetary policy rule considering inflation and broad money as indicators is optimal.

Keywords: broad money; macroeconomic stability; monetary policy (search for similar items in EconPapers)
JEL-codes: E52 E51 E41 (search for similar items in EconPapers)
Date: 2005
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