No. 511 - Information variables for monetary policy in a small structural model of the euro area

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by Francesco Lippi and Stefano Neri July 2004

This paper estimates a small New-Keynesian model with imperfect information and optimal discretionary policy using data for the euro area. The model is used to assess the usefulness of monetary aggregates and unit labour costs as information variables for monetary policy. The estimates reveal that the information content of the M3 monetary aggregate is limited. A more useful role emerges for the unit labour cost indicator, which contains information on potential output that helps to reduce the volatility of the output gap. Finally, the estimated weights for the objectives of monetary policy show that considerable importance is attributed to interest-rate smoothing, greater than to output gap stabilization. This _nding indicates that the welfare gains of commitment may be smaller than suggested by typical parametrizations of New-Keynesian models.

Published in 2007 in: Journal of Monetary Economics, v. 54, 4, pp. 1256 - 1270