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

No 08-004, Discussion Papers from Stanford Institute for Economic Policy Research

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 modifed 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.

Keywords: Taylor rule; money; quantity theory; output gap uncertainty; monetary policy under uncertainty (search for similar items in EconPapers)
JEL-codes: E32 E41 E43 E52 E58 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (62)

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Related works:
Journal Article: Central bank misperceptions and the role of money in interest-rate rules (2008)
Working Paper: Central Bank Misperceptions and the Role of Money in Interest Rate Rules (2008)
Working Paper: Central Bank misperceptions and the role of money in interest rate rules (2008)
Working Paper: Central bank misperceptions and the role of money in interest rate rules (2008)
Working Paper: Central bank misperceptions and the role of money in interest rate rules (2008)
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