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Is money informative? Evidence from a large model used for policy analysis [An article from: Economic Modelling]
Book Details
Author(s)F. Altissimo, E. Gaiotti, A. Locarno
PublisherElsevier
ISBN / ASINB000RR3S32
ISBN-13978B000RR3S34
AvailabilityAvailable for download now
MarketplaceUnited States 🇺🇸
Description
This digital document is a journal article from Economic Modelling, published by Elsevier in 2005. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.
Description:
In this paper we assess whether monetary variables, which are observed with little delay, convey marginal information on the state of the Italian economy, taking as a benchmark the forecasting errors generated by the quarterly model of the Bank of Italy in the 1990s. We follow two approaches. First we map monetary surprises into estimates of the observed structural disturbances using a Kalman filter approach, in order to improve the forecasts. Then we look at the sample correlations among forecasting errors in monetary and real variables, thereby taking into account links that may not be accounted for by the model's structure. We find that bank interest rates have a strong information content. Monetary aggregates play no role according to the first approach; according to the second approach they do, but the economic interpretation of this finding is not straightforward. All in all, the results highlight the role of financial prices and quantities as indicators of the state of the economy. However, they do not imply a mechanical policy reaction to this information, as both the strength and the sign of the relationship between the surprises in monetary and real variables depend on the source of the shocks.
Description:
In this paper we assess whether monetary variables, which are observed with little delay, convey marginal information on the state of the Italian economy, taking as a benchmark the forecasting errors generated by the quarterly model of the Bank of Italy in the 1990s. We follow two approaches. First we map monetary surprises into estimates of the observed structural disturbances using a Kalman filter approach, in order to improve the forecasts. Then we look at the sample correlations among forecasting errors in monetary and real variables, thereby taking into account links that may not be accounted for by the model's structure. We find that bank interest rates have a strong information content. Monetary aggregates play no role according to the first approach; according to the second approach they do, but the economic interpretation of this finding is not straightforward. All in all, the results highlight the role of financial prices and quantities as indicators of the state of the economy. However, they do not imply a mechanical policy reaction to this information, as both the strength and the sign of the relationship between the surprises in monetary and real variables depend on the source of the shocks.
