Faculty of Economics and Business Administration Publications Database

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

Beck, Günter W.
Volume: 5
Number: 2-3
Pages: 524 - 533
Month: April-May
Link External Source: Online Version
Year: 2007
Abstract: The European Central Bank (ECB) 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.