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

• Autores: Javier Andrés Domingo, J. David López Salido, Edward Nelson
• Localización: Documentos de trabajo - Banco de España, ISSN 0213-2710, Nº 5, 2008, págs. 1-51
• Idioma: inglés
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• 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.