Citation

Discussion Paper Details

Please find the details for DP6947 in an easy to copy and paste format below:

Full Details | Bibliographic Reference

Full Details

Title: Central Bank Misperceptions and the Role of Money in Interest Rate Rules

Author(s): G�nter Beck and Volker Wieland

Publication Date: August 2008

Keyword(s): monetary policy under uncertainty, money, output gap uncertainty, quantity theory and Taylor rules

Programme Area(s): International Macroeconomics

Abstract: Research with Keynesian-style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant. Critics, however, have argued that these models need to be modified to account for observed money growth and inflation trends, and that monetary trends may serve as a useful cross-check for monetary policy. We identify an important source of monetary trends in form of persistent central bank misperceptions regarding potential output. Simulations with historical output gap estimates indicate that such misperceptions may induce persistent errors in monetary policy and sustained trends in money growth and inflation. If interest rate prescriptions derived from Keynesian-style models are augmented with a cross-check against money-based estimates of trend inflation, inflation control is improved substantially.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6947

Bibliographic Reference

Beck, G and Wieland, V. 2008. 'Central Bank Misperceptions and the Role of Money in Interest Rate Rules'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6947