Two Reasons Why Money and Credit May Be Useful in Monetary Policy

43 Pages Posted: 16 Oct 2007  

Lawrence J. Christiano

Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Roberto Motto

European Central Bank (ECB)

Massimo Rostagno

European Central Bank (ECB)

Date Written: October 2007

Abstract

We describe two examples which illustrate in different ways how money and credit may be useful in the conduct of monetary policy. Our first example shows how monitoring money and credit can help anchor private sector expectations about inflation. Our second example shows that a monetary policy that focuses too narrowly on inflation may inadvertently contribute to welfare-reducing boom-bust cycles in real and financial variables. The example is of some interest because it is based on a monetary policy rule fit to aggregate data. We show that a policy of monetary tightening when credit growth is strong can mitigate the problems identified in our second example.

Suggested Citation

Christiano, Lawrence J. and Motto, Roberto and Rostagno, Massimo, Two Reasons Why Money and Credit May Be Useful in Monetary Policy (October 2007). NBER Working Paper No. w13502. Available at SSRN: https://ssrn.com/abstract=1021980

Lawrence J. Christiano (Contact Author)

Northwestern University ( email )

2003 Sheridan Road
Evanston, IL 60208
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847-491-8231 (Phone)
847-491-7001 (Fax)

Federal Reserve Bank of Cleveland

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Cleveland, OH 44101-1387
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Federal Reserve Bank of Chicago

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Chicago, IL 60604
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Federal Reserve Bank of Minneapolis

90 Hennepin Avenue
Minneapolis, MN 55480
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Roberto Motto

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany

Massimo Rostagno

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany
+49 69 1344 7663 (Phone)
+49 69 1344 7604 (Fax)

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