Discussion Paper Details

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Title: Data Uncertainty and the Role of Money as an Information Variable for Monetary Policy

Author(s): GŁnter Coenen, Andrew Levin and Volker Wieland

Publication Date: March 2003

Keyword(s): euro area, kalman filter, macroeconomic modelling, measurement error, monetary policy rules and rational expectations

Programme Area(s): International Macroeconomics

Abstract: In this study, we perform a quantitative assessment of the role of money as an indicator variable for monetary policy in the euro area. We document the magnitude of revisions to euro area-wide data on output, prices and money, and find that monetary aggregates have a potentially significant role in providing information about current real output. We then proceed to analyse the information content of money in a forward-looking model in which monetary policy is optimally determined subject to incomplete information about the true state of the economy. We show that monetary aggregates may have substantial information content in an environment with high variability of output measurement errors, low variability of money demand shocks, and a strong contemporaneous linkage between money demand and real output. As a practical matter, however, we conclude that money has fairly limited information content as an indicator of contemporaneous aggregate demand in the euro area.

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Bibliographic Reference

Coenen, G, Levin, A and Wieland, V. 2003. 'Data Uncertainty and the Role of Money as an Information Variable for Monetary Policy'. London, Centre for Economic Policy Research.