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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Data Uncertainty and the Role of Money as an Information Variable for Monetary Policy
Gunter Coenen, Andrew T. Levin, and Volker Wieland

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.

Keywords: Euro area, Kalman filter, measurement error, monetary policy rules, rational expectations

Full paper (637 KB PDF)

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Last update: December 7, 2001