Data Uncertainty and the Role of Money as an Information Variable for Monetary Policy
Andrew T. Levin
affiliation not provided to SSRN
European Central Bank (ECB)
University of Frankfurt
FEDS Working Paper No. 2001-54; ECB Working Paper No. 84; CFS Working Paper No. 2003/07
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 analyze 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.
Number of Pages in PDF File: 46
Keywords: Euro Area, Kalman filter, measurement error, monetary policy rules, rational expectations
JEL Classification: E31, E52, E58, E61
Date posted: December 17, 2001
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