Money and the Natural Rate of Interest: Structural Estimates for the United States and the Euro Area

FRB of St. Louis Working Paper No. 2007-005C

Banco de Espana Working Paper No. 0805

45 Pages Posted: 28 Feb 2007

See all articles by Javier Andrés

Javier Andrés

University of Valencia - Department of Economics

David Lopez-Salido

Board of Governors of the Federal Reserve System

Edward Nelson

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: April 2008

Abstract

We examine the role of money in three environments: the New Keynesian model with separable utility and static money demand; a nonseparable utility variant with habit formation; and a version with adjustment costs for holding real balances. The last two variants imply forward-looking behavior of real money balances, with forecasts of future interest rates entering current portfolio decisions. We conduct a structural econometric analysis of the U.S. and euro area economies. FIML estimates confirm the forward-looking character of money demand. A consequence is that real money balances are valuable in anticipating future variations in the natural interest rate.

Keywords: money, natural rate of interest, New Keynesian models

JEL Classification: E51, E52

Suggested Citation

Andrés, Javier and Lopez-Salido, David and Nelson, Edward, Money and the Natural Rate of Interest: Structural Estimates for the United States and the Euro Area (April 2008). ; Banco de Espana Working Paper No. 0805. Available at SSRN: https://ssrn.com/abstract=965867 or http://dx.doi.org/10.2139/ssrn.965867

Javier Andrés (Contact Author)

University of Valencia - Department of Economics ( email )

E-46022 Valencia, Valencia E-46022
Spain
(34 96) 382 8260 (Phone)
(34 96) 382 8249 (Fax)

David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Edward Nelson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
77
Abstract Views
904
rank
307,301
PlumX Metrics