Reconsidering the Role of Money for Output, Prices and Interest Rates

SSE/EFI Economics and Finance Working Paper No. 514

32 Pages Posted: 25 Mar 2003

See all articles by Paolo Giordani

Paolo Giordani

Norwegian Business School

Giovanni Favara

HEC University of Lausanne; Ecole Polytechnique Fédérale de Lausanne; International Monetary Fund (IMF)

Date Written: November 19, 2002

Abstract

New Keynesian models of monetary policy assign no role to monetary aggregates, in the sense that the level of output, prices, and interest rates can be determined without knowledge of the quantity of money. We evaluate the empirical validity of this prediction by studying the effects of shocks to monetary aggregates using an identified VAR. Shocks to monetary aggregates are isolated by means of identifying restrictions suggested by this class of models. Contrary to the theoretical predictions, shocks to broad monetary aggregates have substantial and persistent effects on output and prices.

Keywords: New-Keynesian models, LM shocks, VAR, Block-exogeneity

JEL Classification: E31, E52, E58

Suggested Citation

Giordani, Paolo and Favara, Giovanni, Reconsidering the Role of Money for Output, Prices and Interest Rates (November 19, 2002). SSE/EFI Economics and Finance Working Paper No. 514, Available at SSRN: https://ssrn.com/abstract=353100 or http://dx.doi.org/10.2139/ssrn.353100

Paolo Giordani (Contact Author)

Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Giovanni Favara

HEC University of Lausanne ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

HOME PAGE: http://www.hec.unil.ch/gfavara/

Ecole Polytechnique Fédérale de Lausanne

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

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