Keywords: Euro area, Kalman filter, measurement error, monetary policy rules, rational expectations
Abstract: This paper demonstrates that money can play an important role as an information variable and
may result in major improvements in current output estimates. However,
the specific nature of this role depends on the magnitude of the
output measurement error relative to the money demand shock. In
particular, we find noticeable but small improvements in output
estimates due to the inclusion of money growth in the information set.
Money plays a quantitatively more important role with regard to output
estimation if we allow for a contribution of monetary analysis in
reducing uncertainty due to money demand shocks. In this case, money
also helps to reduce uncertainty about output forecasts.
Full paper (637 KB PDF)
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Last update: December 7, 2001