Money and the natural rate of interest: structural estimates for the United States and the euro area
- Andrés Domingo, Javier
- López Salido, J. David
- Nelson, Edward
ISSN: 0213-2710
Año de publicación: 2008
Número: 5
Páginas: 1-51
Tipo: Documento de Trabajo
Otras publicaciones en: Documentos de trabajo - Banco de España
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.