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
45 Pages Posted: 28 Feb 2007
Date Written: April 2008
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: Suggested Citation