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Title: Information Variables for Monetary Policy in a Small Structural Model of the Euro Area

Author(s): Francesco Lippi and Stefano Neri

Publication Date: December 2003

Keyword(s): inflation, kalman filter, monetary policy and output gap

Programme Area(s): International Macroeconomics

Abstract: This Paper estimates a small New-Keynesian model with imperfect information and optimal discretionary policy using data for the euro area. The model is used to assess the usefulness of monetary aggregates and unit labour costs as information variables for monetary policy. The estimates reveal that the information content of the M3 monetary aggregate is limited. A more useful role emerges for the unit labour costs indicator, which contains information that helps to reduce the volatility of the output gap. Finally, the estimated weights for the objectives of monetary policy indicate that considerable importance is attributed to interest-rate smoothing, greater than the importance attributed to the output gap stabilization. This finding indicates that the welfare gains of commitment may be smaller than is suggested by typical parameterizations of New-Keynesian models.

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Bibliographic Reference

Lippi, F and Neri, S. 2003. 'Information Variables for Monetary Policy in a Small Structural Model of the Euro Area'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4125