Simple Interest Rate Rules with a Role for Money

60 Pages Posted: 8 Jun 2016

See all articles by Michael Scharnagl

Michael Scharnagl

Deutsche Bundesbank

Christina Gerberding

Deutsche Bundesbank

Franz Seitz

Technical University of Applied Sciences Weiden

Date Written: 2007

Abstract

The paper analyses the performance of simple interest rate rules which feature a response to noisy observations of inflation, output and money growth. The analysis is based on a small empirical model of the hybrid New Keynesian type which has been estimated on euro area data by Stracca (2007). To assess the magnitude of the measurement problems regarding the feedback variables, we draw upon the real-time data set for Germany compiled by Gerberding et al. (2004). We find that interest rate rules which include a response to money growth outperform both Taylor-type rules and speed limit policies once real-time output gap uncertainty is accounted for. One reason is that targeting money growth introduces history dependence into the policy rule which is desirable when private agents are forward-looking. The second reason is that money growth contains information on the "true" growth rate of output which can only be measured imperfectly.

Keywords: Monetary policy rules, euro area, data uncertainty

JEL Classification: E43, E58, E52

Suggested Citation

Scharnagl, Michael and Gerberding, Christina and Seitz, Franz, Simple Interest Rate Rules with a Role for Money (2007). Bundesbank Series 1 Discussion Paper No. 2007,31, Available at SSRN: https://ssrn.com/abstract=2785175

Michael Scharnagl (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Christina Gerberding

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Franz Seitz

Technical University of Applied Sciences Weiden ( email )

Hetzenrichter Weg 15
D-92637 Weiden i.d. Opf
Germany
(49) 961-382-1318 (Fax)

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