DP6812 Money and the Natural Rate of Interest: Structural Estimates for the United States and the Euro Area
|Author(s):||Javier Andrés, J David López-Salido, Edward Nelson|
|Publication Date:||May 2008|
|Keyword(s):||money, natural rate, New Keynesian models|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=6812|
We examine the role of money in three environments: the New Keynesian model with separable utility and static money demand; a nonseparable utility variant with habit formation; and a version with adjustment costs for holding real balances. The last two variants imply forward-looking behaviour of real money balances, with forecasts of future interest rates entering current portfolio decisions. We conduct a structural econometric analysis of the U.S. and euro area economies. FIML estimates confirm the forward-looking character of money demand. A consequence is that real money balances are valuable in anticipating future variations in the natural interest rate.