Money and the natural rate of interest: structural estimates for the United States and the euro area

Serie: Documentos de Trabajo. 0805.

Autor: Javier Andrés, J. David López-Salido y Edward Nelson.

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Money and the natural rate of interest: structural estimates for the United States and the euro area (1 MB)

Resumen

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.