Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099212 | Journal of Economic Dynamics and Control | 2009 | 19 Pages |
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.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Javier Andrés, J. David López-Salido, Edward Nelson,