This paper uses a modified New Keynesian framework to consider the use of monetary information in making monetary policy decisions. We add monetary indicators derived from theoretical models to conventional economic variables in an instrument rule and estimate the equations using euroarea and UK data recognizing that interest rates are set discretely. There is an improvement in the ability to predict changes in interest rates when we introduce monetary indicators which is robust to alternative model specifications. This result adds to a growing literature on the role of monetary indicators showing that this information helps predict interest rate decisions as well as inflation.
Bibliographical noteFunding Information:
We thank Mike Artis, Katrin Assenmacher-Wesche, Anindya Banerjee, Guenter Beck, Roel Beetsma, Andreas Beyer, Keith Blackburn, Mick Devereux, Stefan Gerlach, Petra Gerlach-Kristen, Charles Goodhart, Juergen von Hagen, Clemens Kool, Benoit Mojon, Dieter Nautz, Edward Nelson, Manfred Neumann, Denise Osborn, Andreas Schabert, Alan Timmerman, Axel Weber, Volker Wieland and James Yetman for helpful comments. Tae-Hwan Kim is grateful for financial support by National Research Foundation of Korea – Grant funded by the Korean Government (NRF-2009-327-B00088).
All Science Journal Classification (ASJC) codes
- Economics and Econometrics