Money in Monetary Policy Design: A Formal Characterization of ECB-Style Cross-Checking

12 Pages Posted: 14 May 2008

See all articles by Günter W. Beck

Günter W. Beck

University of Siegen

Volker Wieland

University of Frankfurt

Date Written: February 2007

Abstract

The European Central Bank has assigned a special role to money in its two pillar strategy and has received much criticism for this decision. The case against including money in the central bank's interest rate rule is based on a standard model of the monetary transmission process that underlies many contributions to research on monetary policy in the last two decades. In this paper, we develop a justification for including money in the interest rate rule by allowing for imperfect knowledge regarding unobservables such as potential output and equilibrium interest rates. We formulate a novel characterization of ECB-style monetary cross-checking and show that it can generate substantial stabilization benefits in the event of persistent policy misperceptions regarding potential output.

Keywords: European Central Bank, monetary policy, monetary policy under uncertainty, money, quantity theory

JEL Classification: E32, E41, E43, E52, E58

Suggested Citation

Beck, Günter W. and Wieland, Volker, Money in Monetary Policy Design: A Formal Characterization of ECB-Style Cross-Checking (February 2007). CEPR Discussion Paper No. DP6097, Available at SSRN: https://ssrn.com/abstract=1132234

Günter W. Beck (Contact Author)

University of Siegen ( email )

Unteres Schloss 3
Siegen, NRW 57072
Germany

Volker Wieland

University of Frankfurt ( email )

House of Finance
Grüneburgplatz 1
Frankfurt am Main, D-60323
Germany
+49 69 798 33805 (Phone)
+49 69 798 33907 (Fax)

HOME PAGE: http://www.volkerwieland.com

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